HARVARD ELECTRICITY POLICY GROUP
HARVARD ELECTRICITY POLICY GROUP NINETY-SIXTH PLENARY SESSION
MANDARIN ORIENTAL HOTEL WASHINGTON, D.C. TUESDAY AND WEDNESDAY, OCTOBER 1-2, 2019
Rapporteur’s Summary* Session One. Decline in Revenues: Impact on Generators and Utilities and Options for Response
Generators have been experiencing a noticeable decline in wholesale market revenue. The litany is familiar. Low natural gas prices, competition from low to no marginal cost energy sources, increases in the penetration of distributed resources, increased efficiency in the use of energy, imperfection in the markets and in the rules governing them, individual state mandates or subsidies that distort prices, and retail tariffs that do not send appropriate price signals to end users. Policy options include simply respecting marketplace outcomes and the incentives that flow from them, and doing nothing more than maintaining the current rules. At the other end of the spectrum are those who see real threats to sufficiency of supply, diversity of supply, and adverse environmental effects, and who contend that more coordinated actions must be taken at Federal and state levels to deal with those issues. Are the low revenue scenarios something other than normal market cycle, or are they part of a permanent market change? Under either scenario, what public policy or regulatory response, if any, should be undertaken? Is there any coherence to the wide variety of policy initiatives? Over the horizon, what are the implications for efficient electricity systems?
Moderator. positive, created unintended consequences. Of Thank you, Ashley. And thank you to Ashley and course I’m referring to lower natural gas prices Jo-Ann for inviting me to moderate this fantastic because of Marcellus Shale, at least to regions panel. So we’re going to get things started. that have the infrastructure to bring the gas in. There’s no question that there’s been considerable decline in wholesale market But I digress. Combine all of that with flat or revenues due to a number of changes, many of declining load in many areas because of the which were not and could not have been foreseen investments behind the meter and finally, what I when the states all restructured, or most of the believe is the 800-pound gorilla that is absolutely states restructured. Some of those changes entering the room, how do markets integrate created intended consequences, meaning lower significant state-sponsored resources? I’m electricity costs and shifting risk from consumers reminded of when I testified at a FERC panel to power producers, and some changes, while regarding ISO New England’s then proposal,
HEPG sessions are off the record. The Rapporteur’s Summary captures the ideas of the session without identifying the discussants. Participant comments have been edited for clarity and readability.
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CASPR, competitive auctions with sponsored altogether. I won’t touch on killing baby seals to resources. God, we’re an industry that loves those get to Russian gas to bring to Boston. acronyms. When asked by FERC staff what the Massachusetts administration’s intentions were As a self-proclaimed realist and having regarding the number of long-term PPAs, really represented all parties around the energy table, the only way I could explain it was simply that with the exception of the utility, you cannot run when the legislature or the governors say you the bulk power system on wind, solar, storage, shall, as a regulator, you execute policy and you fairy dust, and unicorns. While more acute in do. New England, this scenario can become challenging in other regions as well. With the And for many states, there is an insatiable and economics of nuclear questionable and massive possibly irrational appetite for clean energy green penetration of renewable resources, what market resources, meaning potentially declining benefits. construct will appropriately compensate those To be sure, this occurs with no thought as to what resources that are needed to keep the lights on and the impact might be to a competitive market, keep us warm in the winter and balance the price formation, and the actual cost to consumers intermittent nature of clean energy resources? with some subsidies buried deep in the ever complicated customer’s electricity bill. On price As is their custom, HEPG has put together a great signals, early on wholesale markets performed panel and it is my privilege to moderate that this admirably just as they were intended to. morning. We’re going to start with Speaker 1, Incentivizing investment in both transmission who is the president of the New England Power and generation but price signals to residential Generators Association. I’m familiar with that customers, maybe not so much. With some group. Speaker 1 represents generators of all utilities billing systems held together with shapes, sizes, and flavors that are all in the basically only Duct tape and bubble gum, forefront of dealing with these challenges in New realistically, because all they needed to do was England as well as other organized, or maybe in produce a very simple bill, there will need to be some cases unorganized, markets across the significant investments in software and country. Next, we will hear from Speaker 2, who technology. works for Exelon who, in addition to being a large utility, is also the largest operator of nuclear The change is definitely coming, especially with generating facilities in the US. Following states changing utility business models to be Speaker 2 will be Speaker 3. Speaker 3 is with much more of a platform to incentivize the Grid Strategies which is a strategic consulting adoption of new technologies. Optimistically, and advocacy firm helping clients with the even with advancements in techs and technology, integration of clean energy into the electric grid I stand here coming from a region that is the and an advocate on grid integration solutions. poster child of concern every single winter for And then batting cleanup is Speaker 4, who is ISO New England, FERC, and NERC because of with the National Association of Utility the lack of investment in natural gas Consumer Advocates. As I became fond of infrastructure. Our bad winters have been well saying throughout my energy career, there is only documented. As I said in a recent op-ed in the one wallet in the room and that’s the consumer. New York Daily News, the fuel shortage became So Speaker 4 brings that critical voice to this so dire, ISO New England estimated that the discussion. And with that, we’ll start with region was only 48 hours from running out Speaker 1.
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an explosion in transmission costs in New Speaker 1. England with increases over the last 10 years that Thank you. And I think with that great tee-off, have really had a major impact overall and that what I want to do is start with a little bit of context has then led to consumer impact on the retail and then transition into where we’re going and level, again as the Moderator highlighted, in what’s going on here and hopefully then engage which, despite the fact that we are seeing some of with the conversation with you all and the other the lowest overall wholesale energy prices, both panelists here. energy and capacity, frankly, we’re seeing rate payer rates go up. As the Moderator noted, New England Power Generators is the trade association. IT represents And here, this is a busy slide but we broke down a fuel-diverse fleet in New England. Within our three of the major Eversource utilities across New membership, we have approximately 90% of the England to try and create as comparable a view installed generating capacity coming from every across the region as possible and there’s really different technology that exists on the grid three major components. The red portion is overall. So to start with some context that I don’t transmission and distribution, the blue in the think is going to be a surprise to anybody in this middle is those wholesale power costs largely room. New England, like most markets in the coming out of the standard offer service auctions, country, is seeing some of the lowest wholesale and then the green portion is what I call public electricity prices in their history. In fact, 2016 policy and that’s things like RGGI compliance, and 2017 were the two lowest price years ever in energy efficiency, and RPS compliance. New England. In 2018 we saw a bump but in 2019, my guess is we’re going to be back close to Overall, you see those blue portions going down those 2016 and 2017 levels. and the other portions going up. And this is now starting to become indicative of what we expect At the same time, we’ve gone through a period of to see in a much larger trend moving forward time in which we’re retiring a significant portion which is those green portions, particularly in of the fleet and adding a significant portion of the places like Massachusetts, Connecticut, and fleet, and so some of those low wholesale energy Rhode Island, will become the dominant portion costs have been met with higher capacity prices. of an overall rate given the large scale contracts And what you see here are the capacity prices that are just now starting to be approved but have within the delivery year. So in 2018 we were not yet gone commercial and therefore there seeing the peak of capacity prices coming out of hasn’t been the bill impact. But I expect to see a FCA8 and that auction which was the one in further shift in how we see the retail rates function which we saw Brayton Point, the second largest overall. power plant in New England, retire. This has helped drive over 4,000 megawatts of new And so this brings us to an overall situation in merchant entry into the marketplace overall. And which I’m concerned that we’re already starting in the context of a roughly 28,000 megawatt peak to see the cracks in the market construct in the load, that’s a significant portion of the fleet that region. We have, despite the fact that we have turns over and is being supported through the nearly a 30% reserve margin, we’ve already seen competitive market overall. a resource seeking to retire be held for reliability and now an irritative process of new market I have to note that, at the same time, we have seen designs largely driven through the capacity
3 market now being looked at in the energy and the question is, how do we ensure that the reserves portion of the markets to try and make resources that go away are not the ones that are sure that we’re actually valuing the reliability going to be necessary to support this changing services necessary. grid and the marketplace overall and how do we ensure that those then left can hopefully be I think that’s the key component as we look at supported through a market-based framework this. What are the services that are necessary to and not moving toward subsidies begetting ensure the continued reliable operation of the subsidies begetting subsidies? And what Joe grid, and if we’re not valuing that appropriately, found in his analysis was, I think, two important let’s fix that. If we need to create new products, components. so be it. I’m concerned that in New England we have not done that. Instead, we chase every One is the intuitive side that the flexible resources previous crisis. And instead, I think we need to are going to become more valuable, but these take a more holistic approach, a more forward- flexible resources are also some of the ones that looking approach of looking at what are the are going to have large scale capital investments overall requirements on the system as we bring required to maintain their operations over the on the new wave of technologies and design next several years. And where is that revenue around them. going to come from in an environment in which we continue to see low energy prices and So a year ago, we published an op-ed in Utility uncertain prospects on the capacity side? The Dive trying to highlight our frustration with how second is a subject that I’m sure others will talk those conversations were going at the regional about. How do you support those large scale level. Following that, we then engaged Joe carbon-free resources, namely the nuclear units, Cavicchi, who is here, in an analysis of what are but also some of the in-region hydro that operate some of those impacts and we found that if you on a merchant basis in New England and finding take, collectively, just the state laws that were on some of the revenue opportunities around that. the books in the fall of 2018, the dramatic shift that would occur in terms of a more merchant- My concern is that if we don’t try and address based system to one that is more contract-based. these things to, and I apologize to my good friend And in fact, this is already now dated where Jan Smutny-Jones, I worry California becomes following the legislative session in both 2018 and our ghost of Christmas future where, if we 2019, if we push this bar out and created one for continue down this path, it will create a 2029, the mandated ability of the states to marketplace in which unless we have some level contract would grow to 70% of the overall of a cost of service or bilateral contract, I don’t megawatt hours in the region. That has know how you survive. And it’s not too late to consequences. And in part, it’s as we try and try and turn this large ship. We have not yet had support resource adequacy, will there be revenue that wave of contracted resources calm that adequacy for those resources needed for portion of the market overall. There is time to reliability? design this but we need to get going because those resources will become commercial in likely the Certainly if we’re going to be bringing on a large next three to five years and given that it takes wave of these new resources, some of the existing about three to five years for us to put in place fleet is going to have to go away and I think that some of the large scale changes that are already is just understood in the marketplace overall. But in process in the marketplace from a design
4 standpoint, we need to start and we need to start ISO New England, we can drive the necessary now. There is some reason for optimism in that solutions to get our way through this. Whether I we’re starting to see the states collectively engage like it or not, the states have made their choices in this in a way that I have never seen in New and are moving forward with these contracted England. resources, and it is now our responsibility to find ways in which we can integrate them into the And so what is here is a block quote from a joint marketplace and ensure that that portion of the statement issued by the six New England fleet that will still rely on competitive market governors, and the Moderator can tell you how revenue streams will have those services valued rare that is to get them all on the same page. This in the marketplace. was largely spurred by a contract approval in Connecticut for the Millstone Nuclear Station, So what does that mean? In my view, that comes the largest power plant in New England. That down to two distinct areas that the ISOs start to contract was granted by Connecticut and on the bleed together. The first is that identification of same day that it was announced, this statement those reliability services. What is the market was released of the governors wanting to work going to need over the next five, ten, fifteen years collectively in this case, focused in part on and let’s ensure that the products are designed nuclear but also to try and drive some of the around that. I give the ISO credit. I think that broader based policies into the market integrated where they’ve started looking at expansion of collectively. They then delegated to the New reserves, co-optimization of day ahead and real England State Committee on Electricity, time reserves, bringing some of those into the real NESCO, which are governor appointees to work time market make a lot of sense and are a great regionally on some of these issues and they starting point, but I think we need to build out submitted a letter to ISO New England back in from there. July calling for analysis and focus in the 2020 ISO New England work plan to, as they put it And what are some of those services, particularly here, analyze potential future market frameworks if we’re looking at resources that aren’t going to that contemplate and are compatible with the be operating as much in the energy market and implementation of state energy and therefore not as reliant on energy revenues. What environmental laws. is going to be the other revenue stream? That’s why we came up with things like capacity Since we can’t help ourselves, we submitted our markets, to ensure that some of those resources own letter to support that NESCO call and, again, that are only necessary in peak shortage events I’ll read briefly. Simply put, the wholesale have a revenue stream and an incentive structure market as currently designed today, does not to drive the investments to move forward. The provide sufficient revenue opportunities to second component of this, I think, is equally maintain adequate investments in merchant important and that’s integrating within the power supply necessary to maintain reliability in markets some of the fundamental policy drivers New England in the face of the coming wave of that are pushing the states in the direction they are contracted resources. in.
My hope is that if we have the generator And let’s be honest, that is carbon. In New community, these states, working collectively on England, if you look at just Massachusetts and this issue with the support and engagement of Connecticut, those two states collectively
5 represent roughly 80% of the load and 80% of the folks qualified within the auctions; however, I GDP. They both have mandatory laws on the think, realistically, it’s unlikely RGGI will be books to cut carbon emissions on an economy- used to provide this more meaningful price on wide basis, 80% by 2050 off the 1990 baseline. carbon, in large part because the RGGI footprint In the short-term, I think the only real way we get is so large that, collectively, a number of the there is drastic and dramatic electrification of the states don’t have as aggressive some of the transportation and the heating industries. And to climate mandates that exist for some of the get there, we’re going to then need to see the dominant states in New England. So my guess is megawatt hours go up as we start replacing it’s going to happen outside of RGGI, although I petroleum molecules and gas molecules used on would love to have RGGI be the vehicle that that end. drives it.
To do that, we need market signals. And while Questioner: And I did have one other an individual carbon price is not a silver bullet clarification question. On page five you have the that’s going to solve all these issues, it’s an three categories of the retail rate and one is green, awfully big chunk of the silver buckshot that one is red and blue or something like that, and we’re going to need across these resources and I then I think you made this comment that the green think it’s a critical component. We’re starting to was going to get much larger and be the see some of the political winds shift on this, in dominant, I think you said. A question for you, which I’m more optimistic that we’re going to see is the green calculated as the total cost of these this, in which we integrated both in the wholesale state mandated resources or is it just kind of the markets as well as in some of those other sectors line item or the writer kind of subsidy portion of of the economy that are necessary to move this it? Can you explain what I’m trying to get at? forward. So with that, I certainly look forward to the presentations of my fellow panelists here and Speaker 1: Yes, so it is the former. It’s the am happy to answer any clarifying questions that overall cost of the component and, I’ll admit, we folks may have in the near-term. had to make certain rough justice assessments as part of breaking it down on an even basis between Moderator: Thanks, Speaker 1. the rates across the states. So it is, there are certainly some nits that can be picked in how we Speaker 1: Does someone have – categorize what’s in green versus blue and the rest of it, but collectively, the expectation is as Moderator: Oh, clarifying questions? that green portion starts going up, the blue portion starts going down because we start relying on the Question: On your last point here when you say, standard offer service auctions for less load and, you know, meaningfully change the CO2 prices, overall, the green portion then, both because of are you suggesting just using something like the scale of the amount of power being contracted RGGI and just increasing the prices or are you as well as the cost of it, becomes the largest single suggesting something more comprehensive than portion of this three-part breakdown. that? Moderator: Another question? Speaker 1: So I think RGGI makes a tremendous amount of sense to use in existing framework in Question: Yeah. And Speaker 1, I just want to which we’ve already got the IT infrastructure and follow-up. So the green, is that existing or new?
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So that would include hydro coming in? What’s they’re working hard in the face of a number of in there? sort of countervailing factors but the capacity price is increasing where needed to provide that Speaker 1: So that is only existing. IT does not missing money that is being lost in the energy include even the hydro contracts which have markets. I just wanted to say a word in our already been approved given that that rate impact defense. doesn’t occur until that resource becomes deliverable. Moderator: Anybody else?
Questioner: HQ power, is that considerable Speaker 2. renewable or that wouldn’t fall in there? Hey, good morning. So I’m with Exelon, as mentioned, the largest owner of nuclear power in Speaker 1: So it’s, it doesn’t meet the renewable the US. We’re also a very large utility with mandates in any state in New England except for customers from DC up to Atlantic City over to the Vermont, but similarly, it would be included in Delmarva Peninsula and then the northern the green as, what I call, a public policy Illinois, Chicagoland area. So we think about this component but is not reflected in this chart today. kind of question of price impacts, changing generation fleet, environmental goals from Moderator: Another question. multiple angles. From, obviously, the owner of the largest source of emissions for generation Question: I just wanted to make two comments. from preserving the value and the operation and One of which is, we at ISO New England have preventing the loss of those units and the very publicly supported a carbon price. I think environmental impact but also from the customer we are starting to come to the same place that we perspective of what’s the impact of taking action came to on gas pipelines which is, it’s not going and of not taking action, both from the electricity to happen. The New England states have been so price perspective and environmental perspective vociferously opposed to a carbon price that, I in terms of climate impact. think, while we agree to elegant, simple, easily implemented solutions and the answer to our So when I read the agenda, I kind of feel like prayers, it’s just, we have to move on, we just we’re asking if not the wrong question, then not don’t see it happening. So I think it’s time to start the entire question by focusing on low prices. looking at some other options and, you know, You know, for me, the question really is, what are with deference to the FERC folks in the room, I we trying to solve through the markets? What are won’t say much about this except that we are we using these tools for? And the agenda tees up working really hard at trying to identify those three issues: sufficiency of supply, diversity of characteristics that we need to ensure the supply, and environmental impacts. The reliability of the grid while we have this influx sufficiency of supply, and I think it’s taken care starting. of through RA requirements, resource adequacy requirements, different structures and the various And finally, there’s no doubt that the state RTOs and regional markets. You can debate governments are having an impact on the blue about the relative merits of each of those, portion but I do just want to point at that where economic efficiency and, say, SPP versus a New you showed the capacity revenues increasing, England model, but the mechanics are there to that is the markets working to some degree and achieve resource adequacy. On the diversity of
7 supply, that’s an emerging issue. Some RTOs are about 4° C for business as usual policies, that’s digging into this more than others. 8° F; 2° C for the 80 x 50 target, that’s 4° F; and 1° C with the very aggressive, 2° F. I note that Exelon folks believe this is really important but observed emissions and temperature increases I’m not going to focus on this area, in particular we’ve kind of already, we’re on a path to blow by because there are some pending matters at FERC the green line, so that’s not really an option for us which actually make this whole conversation now. kind of difficult and several of us will be trying to keep issues up at a high level so we’re not making And so the choice is where are we going to be, the FERC folks leave the room. But I’m going to you know, kind of in between a 2° C and a 4° C focus on that third piece of what the markets are which takes us to the right side of, well there’s a trying to achieve or what the markets maybe used cost of not achieving the emissions reductions. to achieve that’s flagged on the environmental And the gray bar in the middle, that is the, again impact. So, in my mind, low prices should not be this is Trump administration cross-governmental driving the policy response. The policy response panel estimating out at end of century if we are should be, what is it we are trying to achieve and on the path to an 8° F temperature rise, average if prices are high, they’re high and if prices are temperature rise, then the economic damages in low, they’re low, they will drive particular end of century are going to be those add up to outcomes in response. about $1.1 trillion a year. If you avoid that by maintaining to 2° C, that’s the right chart, and Because I’m kind of drilling in on the rough swing is about 50% when you add up all environmental piece, I want to kind of center us the individual line items so that’s a $500 billion in the science. So these are graphics and economic impact associated with meeting our information pulled from the fourth annual emissions reductions. And so when we think National Climate Assessment which was released about environmental externalities and what we’re in November. If you recall, this was the cross- doing in the electricity markets and are prices agency or cross-governmental report that was reflective of the costs that we are incurring released on Black Friday by the Trump associated with running generation, here’s one administration which, on the right side, it shows swing at what the impact of not achieving our the economic damage at the end of century of reductions means. essentially business as usual practices. So that’s a $500 billion per year difference in the So the left side is kind of how we get there; emissions impact. So that’s why states are taking emissions, trajectories, and the kind of top line, action on decarbonization policy. There’s there are some areas that are kind of wonky; discussion at the federal level but we’ll see what RCP8.5, is essentially kind of business as usual happens with that. When you look across most of scenarios with growth of emissions and the the studies, there’s general agreement that you middle scenario, the blueish with the decline is need decarbonization in multiple sectors or pillars essentially kind of an 80 x 50 reduction trajectory, of decarbonization as already mentioned, and then the green on the bottom is kind of true significant electrification, increase in efficiency immediate deep decarbonization through to manage that increased load growth which was extremely aggressive policies. The temperature already mentioned that comes out of impact of those emissions trajectories you’ll see electrification, and then decarbonizing the in the bottom left and essentially takes you to generation stack so that the increased
8 electrification is not being backfilled with in parallel to the growth of essentially renewable emitting generation. generation under this collection of policies. Why are we worried about it now? The decarbonization of the generation sector serves two functions. One is removing the carbon Well, Speaker 1 touched on a lot of this stuff and from the generation stack which is needed to meet I just pulled some graphics from New England to our emissions goals but then the second is to not kind of talk through. So he already covered the replace the switch to electricity as you’re moving growth in the state-sponsored revenues going to away from carbon-intense resources for other state-sponsored resources as opposed to uses like transportation and buildings and all of resources solely relying on the competitive that, replacing it with some emitting generation. markets. And I thought it was interesting that So, we all know the policies kind of active and that’s growing. Right? The current number is up that have been used in the generation to 70%. So on the right is another set of data decarbonization space, CES, RPS, PTCs, ITCs, coming out of that report of the declines in the carbon pricing, already mentioned carbon combined cycle ability to essentially earn pricing, yes, it’s the way to go. revenues in the market as a result of this increasing amount of zero or low marginal cost I totally agree with the comment from ISO New resources coming online. England, we’re kind of not holding our breath. And we are founding members of the Climate And there are various scenarios that depend on Leadership Council. We are pushing this issue at whether there’s cycling on and off overnight and the federal level, at the state level. We would whether it’s colder in here. So the point isn’t to love to see carbon pricing, we’d love to see debate the accuracy of these individual estimates leakage control in PJM but the reality is the states but it’s just that you can see that there’s up to a are moving forward with mandates, RPS and CES 40% decline in revenues for combined cycle mandates. And so that’s kind of the question for units. So then, okay that’s today or kind of over us of do we all agree? Do we think that we’re the planning horizon of what we know is coming going to continue to have a collection of state on and we can put our fingers on. Well what mandates through things that look like CESs and about the future? RPSs and procurements. And that’s kind of where I think I am. I think that’s what I heard Brattle just released a report, I think it was last Speaker 1 say. week, if not, in the past couple of weeks, looking out to the future and saying, okay well what does Then we need to think about how our wholesale the collection of New England states, what do electricity markets, whether they be in the RTO they need to achieve their decarbonization goals? or bilateral, are organized around that set of And as it was just mentioned, two of the largest policies which are not really going to change. So load states have adopted 80 x 50 goals, so they you could argue RPSs, some version of standards are going to achieve significant amounts of have been around for 20 years. Right? RPSs electrification like we just discussed. They’ll be were kind of developed in the late ’90s, kind of ramping up their efficiency as much as they can took off in the 2000s. That’s right around when but they’re going to need to decarbonize the the RTO markets, the organized markets were generation stack serving a greater amount of load also taking off. What changed? We had almost over time. And so Brattle estimates that that’s two decades of market enhancements happening going to be as much as 5,000 megawatts of
9 incremental add of clean generation which solar responsibilities that states clearly have a role in and offshore wind is kind of their two biggest defining the generation mix. And it’s not clear to chunks of how they kind of swing that. So again, me how you separate the generation mix question you can debate the numbers and whether that’s from the revenue sufficiency question as to how headed up at the right kind of trajectory but it’s to support that generation. undeniable that there’s going to be a huge amount of largely renewable generation that’s coming On the other hand, the regional energy and online as a result of state policies. So then you ancillary service markets have undeniable value. can kind of look to, and so I think the question Right? And so regional commitment and there is the New England market, as Speaker 1 dispatch achieves sufficiency results in teased out, like, is the market going to achieve significant consumer cost savings, and it’s not that outcome? You can look to California and clear to me how you separate the operational similar examples out there. requirements from that set of regional commitment and dispatch decisions. So that On the top left it’s the frequency of near or below includes things like ramping reserves, all of that. zero day ahead energy prices at or below zero, So what does that tell us in terms of what we need and you can see kind or right around 1-4 o’clock, to do in these markets? you’re getting up to 10% of hours in California having effectively no revenues coming out of the Unfortunately I don’t really have all of the energy market, so that’s obviously impacting. answers but I think that in regions with capacity They’ve run some numbers. These are from the markets, there’s a very open question whether DMM 2018 market report. They’ve run some they will be able to achieve currently a structure, numbers on what is the revenue adequacy of the they certainly cannot achieve the goals that are combined cycle units? How much are they being established by the states. And so the earning from the market? And it’s a significant question is, what do you do with those? Does the kind of under-recovery of fixed costs under the resource adequacy question in the capacity DMM analysis. So, then, what about the future market regions remain at the RTO level or is there in California? So E3, which has done a lot of kind of a return to, of responsibility to the state? modeling for the CEC out in California has And this gets very close to PJM and New York looked at long-run resource adequacy under the matters, so I’ll just kind of leave it at that. But buildout. What is going to be needed in it’s a very, very open question at FERC in terms California in order to meet their resource of the design of the markets and at the states in adequacy requirements? terms of how they are going to achieve these kind of aggressive investment responsibilities which And again, you see huge buildouts of largely solar are looming. with a bunch of storage under their modeling. And again, you can slice and dice these numbers So on the left I say states are going to need to have in different ways and have different collections of a significant kind of responsibility over the resources, but the take-away is that there is a huge generation mix. I did say states intentionally. It amount of investment that is going to be needed doesn’t necessarily mean that each state is acting to meet the decarbonization goals. And where is on its own. So for example, in New England, that money coming from? So that takes us to the there have been regional procurements of clean market design questions. Right? As I think about energy resources. There can be ways to think this, there’s the almost realignment of about optimizing the decisions that aren’t through
10 an RTO mechanism. based approach?
Now will they be as efficient or not? I think you Speaker 2: I don’t think it has to be. I think states can debate that either way but given the realities, could make that choice but there are other just the practical realities of asking states to cede mechanisms that states could use to, I mean, this these decisions to an RTO subject to exclusive is hard to answer the question fully without FERC jurisdiction, I’m a cynic on that. I don’t getting into matters that are specifically pending see it happening. So then I think, okay, well then at FERC. But I think it doesn’t, it doesn’t have to let’s improve the existing energy and ancillary be. Right? Take the New England clean energy services markets to the extent possible. Let’s procurements. There are ways to engage in focus on reserved product definition, get pricing bilateral contracting on a more coordinated basis better in the energy markets, have products that still rely on competitive markets. RTOs aligned with the flexibility needs, and then leave aren’t the only competitive markets out there. the generation mix questions to the states. That Bilateral markets are competitive. So it just does take us to kind of the bottom of this issue of depends on the breadth and structure of what when the state’s selection doesn’t lead, even those kind of procurement frameworks are, how collectively, to the reliability requirements that they are designed. need to be met by the RTO. These do loop right back to the conversation that started the capacity Moderator: Any other clarifying questions? All markets years ago of RMR agreements leading to right. the need for a centralized capacity procurement. Speaker 3. But I challenge us to think through that issue Thank you. The Moderator mentioned who we differently now because I just, I’m not convinced are but if you don’t know, I’ve worked in and that the centralized capacity markets, as we know around renewables for about 15 years so that’s the them now, can really answer the investment kind of large focus. Our mission at Grid question, the clean energy investment question Strategies is really low cost decarbonization. So that we’ve got. And so we need to think through we do work for wind/solar storage as well as a way to maybe lean on the states a little bit more consumer interests occasionally. I told Bill I was heavily on this, this backstop procurement issue, going to attempt a two-fer here today. We have a whether that’s local reliability or resource morning panel on what to do about low prices and adequacy. So, again, I don’t really have all the we have an afternoon panel on what are the answers. Hopefully we are all teeing up the lessons from California, and I’m going to try to questions and we can have a good debate. have a single an swer to both questions.
Moderator: Thank you. Any clarifying I’ll give you a little heads up, the answer is we questions? need real buyers of power and they need to be creditworthy and capable of doing their job. Now Question: I think this may be borderline but I’m to build up to that, just to mention, what I’m going to go for it. Speaker 2, so if centralized talking about today is really based on a couple of RTO capacity markets don’t work, are you papers. The one on the left was for the Wind suggesting that when the states do their capacity Solar Alliance about power market design for a procurement and resources, that basically that decarbonized future and the one on the right Mike should be done essentially going back to a rate- Hogan and I did recently and that was part of an
11 energy innovation series. Now first to get one part of the supply curve, it almost affects price not issue hopefully out of the way in terms of what’s at all. So that’s a way of saying that I think at causing low prices and the reason for this panel, current levels of penetration, we’re not seeing this one often hears and the blurb for this panel big monster called the zero marginal cost mentions not only the issues but let’s be clear, problem that’s wrecking our markets. low natural gas prices are far and away the biggest driver. So for everybody who is suffering But now let’s talk about the long-term future. from low power prices out in the market, I think Lawrence Berkeley Lab also did a report on high we can all feel sympathy and who saw that renewable penetration, so they were looking at coming? If we had, we’d be rich and all that. 40% penetration, much higher than we have today. They did this for four or five regions. You But this is a slide from Lawrence Berkeley see the familiar shape, this is the changing load National Lab. The beige line is the natural gas shape, the duck curve. The current red line, that’s price, the blue band is the power price and you current prices, what prices look like over the can just see how closely they track. Natural gas hours of the day. The three bars below that in prices set the power prices in most wholesale different colors are the portfolios. You can markets, so there’s just such a strong tie between maybe just focus on the blue, which is high, what the gas price is and what the wholesale which is sort of balanced wind and solar or 30% power price is that that’s really the reason for the wind and 10% solar. Obviously the yellow line low prices that we’re seeing. In the context of the with high solar gets more of the duck curve shape. whole kind of resilience coal bailout, whatever But you can see you do have low prices in the you want to call it from the Department of middle of the day. Energy, Lawrence Berkeley Lab did some work for DOE trying to figure out what are the causes So, yes, we are getting to a future where we’re of the low prices. going to have lower prices at certain times. And so the question that I think a lot of people are And there, again, you can see that the left bar that, asking is, 10 years out, what market structure are between 2008 and 2017, what’s the cause of the we driving towards? Not to hit you with too drop in prices? That big green bar is natural gas much business, if you just focus on where the price. So there again you can just see the order of arrows are pointing here, these are the average magnitude here. Natural gas prices are really the annual price decreases and the green one is the reason we’re seeing low power prices. So I think balance. So there’s a 21% average drop in we should be clear on that context. Now as a wholesale price in SPP, New York gets high 30s, renewable person, you might say, ‘Oh, but you’re 23 in California, 17 in ERCOT. So, you know, trying to hide the effect of renewables,’ and I’m 20-25% is typical if we really ramp up wind and going to get to that. At current levels of solar, yes we’re going to have somewhat lower penetration, we see, this is University of Texas average wholesale prices, you know, it’s not Austin, showing the right supply curve of the dramatic, it’s not zero all the time but 20% is supply stack shows that green, low, that’s the zero meaningful. If you go to the third from the marginal cost effect there. bottom band and you look at price variability, that goes up. So at most levels of demand, there’s almost a trivial impact on price. You can see that you add You can see in some of these charts, like, let’s that if big slug of low cost renewables on the left look at the ERCOT one on the far right, there are
12 times of day where prices do get very high. And that renewables don’t contribute to the reliability. so I think you can say, well if we had sort of a pure market, we’re going to have somewhat more This is the famous ISO New England Fuel variability and we’re going to have higher prices Security, Energy Security and Resilience study, at certain times and lower prices at other times. Operational Fuel Security something or other, But here, again, we’re talking 10, 15, 20 years Analysis, OFSA, I missed that acronym, I lose a out. Does this mean we need a revolution in our point. But if you look, four of the five or six most market structure and design or is the basic kind of reliable scenarios are high renewable scenarios. structure and design that we’ve been talking So you can look at the report and see how that about for 20 years at HEPG and 20 years at happens, but you just don’t assume that FERC, is that robust to this future with all these renewables are just there providing clean energy. zero marginal cost resources? They’re also contributing to reliability.
So I am going to take the position that our basic Let’s talk about this long-term future. I think market structure and design that we originally there are some well-accepted physical system talked about and most people here were a part of requirements if we are going to do high it is robust and can handle this change. I’ll renewables, and maybe from here on out let’s acknowledge as the Moderator noted at the stipulate with wind and solar being as cheap as outset, that we do have an economic question of they are, let’s talk about a high renewable how do we deal with market structure and design scenario and what’s its system look like. So first with zero marginal cost resources noting that of all you need very fast dispatch; fast, far, and energy and other services are needed at times and full. I tried to summarize it. Far means you need places that renewables alone won’t provide, large regional balancing areas. RTOs do that but which is a point I think we can acknowledge if the wind is not blowing here, it’s blowing that’s true. Now whether that’s demand response somewhere else and the wind balance system will and long term storage or gas or whatever other work solar so you even get some time of day resources to fill in the gaps, we can all argue balancing of solar in different time zones. So about that but we do have the sort of economic with all these things plus just the variability, you question. How do you make sure one can invest can get a lot more for low cost if you balance it in this market and provide all of those resources, across a very wide area. So we do need large not just the clean, but all the resources you need regional markets. for reliability? And I think as Speaker 1 said, we need to define There are some other technical questions that are the reliability services and precure each of the also very interesting. I think solvable but services you need. I would start with the NERC- challenging is whether physical balancing can be defined central reliability services. You can achieved with the highly variable supply mix and Google that, look it up. They pretty much define then frequency support when you lose the inertia what those services are. The exact quantities do from synchronous unit retirements. I would vary by region. ERCOT is more of an island and highly recommend going to the Energy Systems needs more frequency support, etcetera. So the Integration meetings on those. There’s a lot of numbers are different but the services are vibrant discussion there. But I’m going to focus essentially the same. So let’s start with, we more on the top one which is the investment should always do, I think, structure before design. question. Just a note on reliability, don’t assume Let’s talk about who should do what and Speaker
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2 got into this. failure and nobody precured their long-term contracts to bring in the resources needed to serve First of all, certainly environmental externalities that load. need to be internalized. There are a lot of ways to do that. There are first-best, second-best and That’s a problem and I think that’s a job for states. 20th-best ways to do that and we can argue about That’s not an RTO credit issue, that’s a state that. That’s a second, separate conversation. The licensing issue. If you want to do business in our RTO/ISO, the grid operator, so I’m taking the state, you’ve got to make sure you’re capable of position here about, you know, one way to do all serving load in the state. In this vision, utilities of this that I think is feasible economically and are largely wires companies. They are, you physically. You go back to what FERC originally know, transmission and distribution are still said in Order 888 ISO Principles and Order 2000 natural monopolies, that hasn’t changed, but Characteristics and Functions for RTOs and it generation was declared competitive 30-some- was basically kind of the neutral air traffic odd years ago. It’s even more competitive today controller focusing on the real time operation of with the small scale of generation, small size of the grid. So that’s their job. They don’t care competitive generation, so that should be about price. They’re just, they don’t care, you competitive everywhere. Independent power know, they’re not the air traffic controller trying producers provide all that generation. They bid to tell Southwest Airlines how to run their for those competitive procurements. Again, it’s a business. They’re just the neutral operator. competitive sector. We can rely on them to Retail suppliers competitively precure power, or compete and provide consumers with good value. hedge for this sophisticated audience, with long- term contracts, PPAs to serve their load. And then there are financial participants allowed to provide risk management products, and I’ll get As Speaker 2 said, bilaterals are not a dirty word to that in a minute and how that fits in the whole in this, in this vision. They are critical to picture. Now everybody here will recognize this financing new generation and for managing price picture. I’m not just sucking up to Bill here, well risk for consumers. Now here, I highlighted some there’s some of that. But we’ve known what the missing pieces. At this top, we’re not really core workable market design has been. So we did internalizing externalities yet but this is, I think, market structure before, now this is market an important conversation. For states for those design. It relies on a bid-based security retail suppliers to really serve their customers, constrained economic dispatch with nodal prices, they need to make sure that retail suppliers are financial transmission rights. There are bilateral actually credit worthy buyers of wholesale schedules up at the top. This was sort of what power. Now the PUC of Texas does oversee, as FERC decided and most of the RTOs decided in Travis and others have pointed out to me, the the mid-’90s and what we’ve been doing and this credit worthiness of the buyers in Texas. I don’t part of it is working very well. think they do enough, but we have to avoid the risk which I think a lot of states that went to retail It also, I should note, provides a large regional competition forgot about which is; some retail operation for the high renewable future, so that supplier opens up a business in their garage, they market design is very much the friend of clean serve a bunch of customers, prices get high, they energy. Now some other pieces of this, again, say I’m out, they go bankrupt, their customers are there is an active bilateral market that works in left in the lurch, there’s a public good market concert with the spot market. These PPAs are
14 priced, not at marginal cost, nobody is signing this is just our own numbers we’ve put together wind or solar PPAs at zero, you sign it at the price duration curve. These are prices over essentially the average cost over the long-term for $200 and quite a lot of times, it looks like 25 those units. You do always have the spot market hours the prices got over $1,000 in Texas and for residuals. Everybody winds up longer or with an eightish percent reserve margin, you shorter on any given day. Hourly locational would expect some high prices from a consumer pricing. Reliability services and this gets to perspective. You have to compare this to the Speaker 1’s point to find the reliability services capacity market. And would you rather pay this and competitively procure them. The exact needs for a few hours and also knowing that almost will vary somewhat by region but the services, everybody is fully hedged, so almost nobody frequency, support and different types of actually paid this but you did have some high operating reserves are essentially the same. Now prices in Texas. scarcity pricing, I think we have the advantage now. We’ve got some years of testing and this Now is this getting to revenue adequacy? Well, I has now been proven out. This is an important think people are going to start writing the part of a workable market. postmortems. We just did our own. So if you look, now the Potomac Economics chart is for a Operating reserve demand curve scarcity pricing, combined cycle and you can see prices are well the value of the energy at the time and place you below the blue band in recent years so generators need it will be an important thing. And the most are not recovering their investment costs. You important thing about this is that we’re all failing could say, well that’s gas prices and it’s in determining when exactly those scarcity unfortunate but that’s the market. But let’s look conditions are going to happen. MISO is finding at Texas. Now we’re going to shift to peakers, if them at shoulder periods in the spring and fall, in the peaker net CONE is one hundredish dollars a the northeast it’s polar vortex, sometimes it’s kilowatt year. In 2019, year-to-date, they have winter. All the planning models are based on earned $123 a kilowatt year and they’re on track, summer peaking but that’s not actually when if the rest of 2019 is like 2018, they’re going to many of the conditions happen. So the point of wind up at $137. So they’re going to be well scarcity pricing is we can’t predict. We don’t above what they would need to attract and retain know when exactly they’re going to happen but investments. So I would say early signs are good we’re equipped with the right pricing to attract for Texas finally working. They do now have the flexibility and power when we need it. scarcity pricing and operating which are demand curved so this is a model that seems to be I’m going to skip the last point for the audience workable that we can use. here. The main point, getting back to the structure, is RTOs are in the business of short- Now a couple of comments before I wrap up here, term operation and so you don’t get into half the just on how things are going in ERCOT. This is, debates we’re having about capacity market folks here know Julien Dumoulin-Smith. There design in this. Now is this working? Well, every has been a rally in power pricing so maybe this year we seem to look at ERCOT and say, oh this whole era of low prices is over, at least when you is the big year, we’re going to test it in ERCOT get the right market design and supply and and we’ve had another test. I don’t know how demand in a different place than we have in the many years or decades we have to keep doing this northeast anyway. So they are perceiving, from but, okay, let’s look at this other test. So this year, an investment perspective, that there’s an
15 opportunity to invest there. Now let’s also be clear, you don’t invest in 40-year assets on five- Speaker 3: Let’s see if I can still get that. minute prices. I’m not claiming that you do. Questioner: On the bullet for retail suppliers, can So I hate the whole phrase, energy-only market, you clarify more if there’s a difference between because it’s not an energy-only market. There are competitively hedging and PPAs? And then physical bilaterals, synthetic PPAs, all kinds of when you say PPAs, do you have a sense of how long-term arrangements that are serving to much time or length there is in that PPA? finance the new generation, again if, and only if, you actually have creditworthy buyers who will Speaker 3: Well, so some form of long-term sign those contracts. Those can be utilities or contract is needed to finance new wind solar other entities, but you do have to avoid the free storage, whatever resource, whether that’s five rider problem which they have largely avoided in plus years, seven plus years, I hear things in Texas. This is from an actual investor prospectus, those, in those ranges. Obviously everybody someone going around and trying to finance a would prefer a 25-year contract, every generator wind farm in Texas. They have a 12-year hedge would. As to whether it’s competitively procured arrangement. ERCOT has no visibility into this or otherwise procured, I mean, certainly you can nor do they need it, it’s not their job, but these finance with rate-based, you can finance in other long-term contracts do exist. People are investing ways. I would say from a consumer perspective, based on these private bilateral contracts. there should be competitive procurement from independent providers unaffiliated with whoever You can also do a basis hedge and hedge other is doing the procuring and that’s the way to risks if you want for congestion. Texas industrial minimize the cost of it. consumers recognize this as what’s going on and say bilateral hedging activity and premium Questioner: Just one other quick follow-up. forward pricing provides a considerable revenue Have you looked into the misalignment between stream for generators beyond the ORDC. This is those terms and the average retail contract being an efficient market solution so I think consumers somewhere below 24 months? So you’ve got there are recognizing, you know, again this model retailers who, on average, sign contracts for less can work. This is going to be a long story but I than 24 months across all sectors and then you’re think I’m out of time. Just the idea that I mentioning years that are five, seven, twenty- mentioned first-best, second-best public policies, five? you can have, this is Michael Goggins’ home and he put up the solar panels on the right and then Speaker 3: That’s right. So, and again, the based on the incentives, his neighbor pointed his ERCOT model is one way to do it and you do straight up in the sky and was not getting any sun. always have this issue with retail access, that So we’ll just acknowledge from a renewable consumers can move and if you’re a retail perspective that not all policies are first-best. provider, you have that challenge that your [LAUGHTER] consumers could leave and then why would you sign a contract for a multi-year PPA, and you’re Moderator: Clarifying questions? Yes? right to raise that issue. In Texas it seems to be working where there are private market Question: Speaker 3, I think it was slide 11 when participants who will go out and sign that you were talking about the structure— contract. So Goldman or, I don’t know, Heart
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Tree or one of these other entities or just could clarify more what you had in mind in terms marketers will sign those contracts. And they are, of how decisions would be made for what and that’s how people are financing new transmission is built to support new renewable generation there. generation and how the costs of that new transmission would be paid by different Question: I have a quick clarifying question I consumer groups? think. So in your model the utilities are just T&D entities and there are retail suppliers that procure Speaker 3: That’s a great question, maybe for power to serve a load, but then at the end you said another day but since I mentioned here, the RTO one of the potential counterparties for a long- is also a natural entity to do regional planning term PPA would be the utilities. Why would they because, again, you don’t need two different sets sign it? of lines and you can find reliability improvements and efficiencies if you have the RTO also do that Speaker 3: Well, I guess you’re right, the pure as well as the balancing. I would say from a version of this would be that you don’t have the consumer perspective as well as a renewable utilities doing the procurement and you just have perspective, that they should essentially be doing the utilities as wire companies. I mean, I was sort more proactive economic planning in addition to of thinking about Texas and ERCOT. They do just reliability planning and if you have, vast have a combination, they do have some cities that areas of low cost renewables, the planning should buy power, they have munis so that is one way to take that into account. do it if you’re just focused on the financing problem, having those entities do it. My favorite types of plans are those about the future, and that seems to be the future and that But you can do it with full retail choice if a state seems to be what consumers want. And so our so chooses. A state could also choose, and this is transmission planning, I think, should be probably what I would do if I were a state proactive efficiency as well as reliability based. regulator, I might say, well residential customers And then how do you spread the costs, In the like myself hate getting stuff in the mail and we FERC jurisdictional area it's roughly don’t always want to choose so maybe a certain commensurate with the beneficiaries. I think that set of the mass market has some type of planning. regulatory principle can work. It doesn’t mean Maybe it’s a New Jersey style PGS where there’s it’s easy. FERC will, at the end of the day, have an auction for a large group of them. There are to sort out who pays how much but the principle other ways to do it, other forms of group buying is workable and has been implemented. for consumers maybe who don’t want to choose. That’s an option but, again, you could do the full Moderator: Other questions? retail model and you can finance generation with that model. Question: Yeah, I just wanted to follow up on the question about transmission planning and the Moderator: Other questions? other point here. There’s a lot of behind the scenes handwaving where we say, “Oh well, Question: Yes. I think this is a clarifying that’s just a job for the RTO,” and if you actually question of the same slide. Reflecting on taxes or knew what ERCOT is having to do or what New more generally on a best market structure for low England did to build new transmission into cost decarbonization, I was wondering if you Connecticut and it’s all in the assumptions. If you
17 look at ERCOT, their reliability planning for are being pretty clear about the resources they transmission building is to assume, is to run a want. So the Order 1000 rule about, oh consider market six years out and they don’t have enough state policy, so you have one meeting and, yeah, generation to meet load so they just scale we thought about it and then you move on. That everything up and down and then they have doesn’t work. We’re going to have to review certain criteria that figures out, what, it’s not public policy and incorporate that into planning. based on where the wind is built and it’s just an opportunity for people who understand the rules Moderator: Go ahead. to figure out behind the scenes rent seeking to get certain transmission built which is not necessarily Question: Sorry but my transmission colleague optimal. has left the room and I suspect I should ask this on her behalf. Are you saying, first of all it’s And I think we have to be very careful to grow all interesting we’re talking about transmission this onto RTOs and say, “Oh well, they’ll figure because Texas is so different from the other out the transmission solution.” But because, in RTOs. Right? In the other RTOs it’s the fact, what you have is generation and generators that have the deliverability transmission actually competing with each other requirements and Texas, we build, you’ll come. and having the locational element. So if New So if you could clarify in terms of some of the England decides to assume that there’s going to statements you’ve made, how you view those be no gas generation located inside Connecticut, different models and what you’ve said? And two it’s very easy then to socialize two billion dollars is, I’m hoping that you will clarify that you really of transmission to me and other New England didn’t mean transmission is a truly regulated consumers based on a reliability need where if natural monopoly. So maybe you can clarify they made different assumptions, they wouldn’t. what you meant by that.
Speaker 3: I totally agree. It is a regulated natural Speaker 3: Well, I think it is a regulated natural monopoly and the regulators and all of us monopoly. Now I can tell you’re getting at the participants in the regulatory process need to be competitive bidding aspect of that and, look, one involved in that. And they have tough choices way to regulate natural monopolies is to require and they need to make regulatory decisions. They competitive bidding for the right to own that could invest here or they could invest there and to asset. So I’m not going to get into that debate any assume that there’s going to be no increase in further now. We’re already pretty far off topic. renewables or electric vehicles or other things But it still is a regulated natural monopoly. Now that are going to change the use of the system your first question, yes it makes a big difference would certainly be wrong. And it’s not obvious whether the job of paying for a new transmission what is the right answer in terms of those is on the generator versus sort of on load, that’s assumptions but they have to be made. certainly important. I would say, just from a consumer perspective, the main thing is to make And so somebody has got to make sure those sure we’re proactively planning for the expected decisions get made and we do good plans. Again, future resource mix and then we assign costs in a to me, we should plan for the future. And we fair way across all resources. Does that mean it’s might disagree somewhat on where the future is 100% generation versus 100% load? Probably going but if you look at Speaker 2’s charts, we not. There’s probably some combination there don’t disagree, there’s some imperative and states but that’s probably a panel for another day.
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of different political constraints. Moderator: I guess I’ll do the moderator’s prerogative for just a second because we’re So with that, I do my best. But I do have a running low on time and I think the consumer message, I think, from the consumers and that is voice is so critical to this panel. But just an this. Low prices are not a problem we need you observation, I guess as a regulator that sat on to fix. [LAUGHTER] Okay, let me say that siting commission, I think the contrast with again in case anybody missed the subtlety and ERCOT is really interesting and Texas is nuance in that statement. Low prices are not a certainly probably the most different place there problem we need you to fix for us. Okay? Now could be from Massachusetts to New England what I thought I would do with my little piece of since you can’t site a hamster wheel in time because I don’t have a PowerPoint slide and Massachusetts and that includes transmission to I’m not deeply involved in all of the markets to bring in green energy and all of that. That’s the give you data, what I thought I would do is give first observation. you a short, abridged, slightly tongue-in-cheek history of restructuring according to consumer And the second one is uncapping electricity advocates. markets. And I believe Professor Hogan, way back, I asked you a question about, and I fielded And it goes something like this. Bill Hogan came questions in 2015 when the capacity prices went forth and said, I have an idea, we can do things nuts and they basically wanted ISO and Gordon’s different, generators are not necessarily natural head on a stick. We were fielding questions from monopolies, we can break them apart, we can every congressional office because they were so create markets, we can get efficiency, we can do angry about high capacity prices. I can imagine amazing things, and we will get low prices for if they uncapped the energy prices in New consumers. And about a third of the states said, England. I think it would be politically, shall I yeah let’s do that; a third of the states said, no I say, unpalatable or challenging. But that’s just an don’t think so; and then there’s the west, and I’m observation with my experience but this is not even here to talk about the west. Jan’s here to interesting. And I want to turn now to Speaker 4 talk about the west, so I’m not even talking about to talk about the consumer’s voice. the west. So in the third of the states that said, yeah let’s do that, we said, first we’ve got to Speaker 4. separate the generators from the transmission- Well thank you. I don’t know if everybody in this owning, still natural monopolies. But there was a room is familiar with NASUCA, the National problem. Prices were going to be so low that Association of State Utility Consumer those poor utilities and those generators were Advocates. So we are the state level statutory going to lose a lot of money. So they came to advocates involved in the rate making process. I consumers and said, look, if you just pay a little always have to start off with my standard bit of money, then you can get low prices out of disclaimer. I have 58 members in 43 states, DC, these markets. Virgin Islands, Barbados, and Puerto Rico. I can’t often speak with one voice. I can’t give you And so we created stranded cost recovery funds. a specific answer to anything. I have a lot of Billions of dollars were charged to consumers so different constituents with a lot of different that we could go forth, operate in these markets, opinions operating in a lot of different market and get low prices. What a deal. Fast forward structures with a lot of different answers and a lot slightly a little bit, the markets are up, they’re
19 running and natural gas goes to $13 in MMBtu, this and I’m going to go high level for you FERC natural gas set the marginal cost on the market for folks because I know there are open dockets, but every kilowatt hour sold in that market, and those the consumer advocates have always struggled lucky people that owned coal plants and nuclear with transmission and the cost of transmission, plants made money hand over fist. It was RTOs and the huge administrative costs of RTOs. amazing. It was a massive transfer of wealth from consumers to the utilities that owned those But there’s this broad idea that says, “Look, plants. So having paid for the stranded costs that you’ve got to build transmission because were going to occur due to those low, low prices ultimately, if we want to support these markets, if and then finding out we had high, high prices and we want these markets to work, and if we want we were paying again, we said, “Hey hold on a these markets to deliver low costs to consumers, minute, we need to fix this problem.” we have to have transmission.” They’re the grease on the wheels of the markets. That’s what This is a problem. We should lower rates for reduces our congestion costs that reduces our out- consumers. We should do something. And the of-market dispatch. So it’s okay that we pay very answer was, first, markets, what are you going to high return on equities, we pay hypothetical do? And then the second was that old economist capital structures, we pay RTO bumps on ROE, crutch, well, you know, the cure for high prices is we pay all of this excess money for transmission high prices, just kind of hang out and it will fix because ultimately, again, if we just pay enough itself. In the meantime, consumers paid and then we’ll get our low prices. consumers paid and consumers paid. So we had to pay a little bit more so that we could get the And so we’ve paid what we believe are fairly rich low prices. Now the interesting thing is they also prices for transmission to get our low prices. said, “Look, high prices will lead to market entry, Now we’re also seeing this phenomena in the it will lead to innovation, it will lead to new low distribution side, and I know this is not really cost solutions.” Great. We’re still waiting. distribution oriented, but what we’re seeing now is a massive push at the retail level, local level to That did actually, strangely enough, happen in the rebuild utility transmission, or excuse me, retail natural gas industry. Those $13 in MMBtu prices utility distribution assets because we’re going to combined with some technology changes led to a have smart grids, we’re going to have distributed push on drilling. We did shale, we found out how resources, we’re going to have responsive to get gas, we have an overabundance and a pricing. We just need to spend a little more supply of gas. And guess what? Economics money so that we can, once again, capture those works, prices come down. Great, that’s good for efficiencies, get low prices for consumers. And I consumers. In the markets, well, those high think the slide that Speaker 1 had showed that one prices never really led to entry per say. So what of the, if you look at a consumer bill, yes would we do? We need to create capacity generation prices have finally gone down, finally markets because the issue is we’re not paying distribution and transmission costs are going up enough money in the markets to get the low prices at a pretty rapid rate on consumers’ bills. that we need to see. So we will create capacity markets, we will pay more money in the markets So we find it difficult to have finally arrived at a to support capacity so that we can therefore have place where we’re getting the low prices on the our low prices. Great. We did that and we moved generation side and we’re back to square one forward. There is also a transmission element to where at the individual states, and I’m not here to
20 say any individual state is approaching this in the system and what can actually be delivered to correct or incorrect manner, that obviously is a customers on a local level and it might exacerbate state level question, political, but at the state level in great measure some of the generation they’re saying, “Look, we need you to pay more challenges that we have. So I just want to throw money, consumers, to keep our low prices, storage on the heap because I don’t think anybody whether it’s subsidies on nuclear or other things.” has even mentioned it today and I think if you look out 10 years, storage is going to be a game I think there’s this struggle again that we talk changer. But again, I tell you all this because as about efficiency, we talk about markets, we talk you go forward in whatever it is that you do for about what we want the markets to deliver, and your day job and you confront these problems and we’ve finally maybe arrived and we’re sort of you have these high level discussions in high wrapping ourselves around an axle to figure out level, with high level people in rooms like this how to not deliver that for consumers. Now I and you’re trying to come up with some answer only tell you this little bit of a story because, from to this problem, in the back of your mind I just the consumer side, we feel like we’ve paid and want to plant this little seed. we’ve paid and we’ve paid and we’ve paid and we’ve paid and maybe, just maybe in this instant I hope that this seed gets planted that as you have of time, we’ve earned the low prices that we’re the discussions, you take a moment and you step getting. So leave them alone. back and you say, “How much more do I need customers to pay to get the low prices that we I would also suggest, and I think this is actually deserve?” I think you should always ask yourself not out of line with what Speaker 3 said, you that question instead of just going about solving know, maybe the cure for low prices, as we said the problem that, really, we don’t need you to before, is just low prices. The markets are going solve right now. So not a highly technical to adjust. Eventually, as we put the technology discussion, but an important discussion. The on the distribution system for consumers to take world is not bad for consumers right now. It advantage of, perhaps, the low prices in the duck doesn’t need help. Thanks. curve in California in the middle of the day or the low prices in the middle of the night in the middle Moderator: Clarifying questions? of the country due to excess wind, people will [LAUGHTER] adjust. As we look forward, low prices may take care of themselves and so this is not really a Question: Thank you very much for that and it’s problem that we should be in haste to fix. And hard to ask a clarifying question on that one. then finally, and I just want to throw this in, nobody has really talked much at all about Speaker 4: Strategic. [LAUGHTER] storage. Questioner: When you think about low prices, In this whole discussion we’ve talked about the focus has been on the prices that energy renewables and markets and transmission and markets produce. What about the dollar that’s generation and I’m sort of of the belief that coming out of the consumer wallet for things that storage is going to have a huge impact on how we are outside of the energy market, like externalities go forward. And frankly, I think it’s going to that are now being priced in in different ways, it probably on one hand provide a lot higher levels might be a ZEC or an increased REC as RPSs of efficiency in terms of how we operate the increase? So when you talk about low energy
21 prices, I get what you’re saying but there are also people to behave in manners that would be new heretofore not seen charges that consumers beneficial overall. Again, that’s probably a are bearing. Could you just comment on that? whole separate conference too other than this one.
Speaker 4: Yeah, we don’t like those either. So yes, at the end of the day it’s the total bottom Here’s the struggle. For the purposes of this line bill for consumers and it’s the electric bill discussion, I was trying to be very oriented plus the water bill plus the gas bill and then around generation markets and what we’re trying whether you most people have at least a telephone to accomplish in generation markets and what’s bill if not something. So it’s the total package of going on there. And again, generation markets energy costs for consumers that we are concerned seem to be working pretty good by our accounts. about and there are a lot of external factors and We’re getting low prices. But yes, on the other things on those bills that we are troubled by. side of the equation, states are responding to the low prices and cries to their utilities or at least Moderator: Other questions? their local constituent about loss of revenue and the political reality of jobs and displaced workers Question: So I see what you’re saying but when and those kinds of things. you go from high prices to low prices there’s this wedge there that creates an opportunity for all All of which are extremely valid political points kinds of public policy benefits or investments in but they’re not really part of a pure economic resiliency or assets that we want to keep around equation. So we struggle with those questions. If or transmission projects that contribute to you look at the different state proposals, I will tell reliability and you can do that without actually you that my members have different reactions in lowering the prices because the wholesale prices the different states that you’re looking at. Some from natural gas have gone down and we’ve got proposals, I think, are designed better than others. this opportunity to fill that gap with all these other I can’t comment on whether it’s good or bad but things. How would you respond to that? I would not that the ZEC proposal in Illinois at least had a range where if power prices stayed up, Speaker 4: Well yeah, that head room argument, they had to give some of the money back. we’re not a fan of that argument too because what you’re basically saying is that instead of Not necessarily a bad idea. But, yeah, we transferring the low prices to consumers, we’ll struggle and have always struggled with sort of just find new ways as administrators to spend the retail level, what’s the total bill to consumers your money on things that we think might be and what are the drivers, and we could have a good. [LAUGHTER] Again, if you want to whole separate conference on the distribution regulate the markets, let’s have regulated side of the utility and some of the things that markets. we’re paying for in terms of upgrading the distribution system and what we’re getting for all But there’s an infinite possibility and an infinite of that. And change is probably, again, there’s a number of opinions on perfectly valid and whole separate conference you could probably reasonable ways that each of us would spend have on how we modernize and make more money on our pet project. There’s a million efficient the connection between the distribution hands at the table looking for money. I urge and the generation system so the consumers see caution in taking that head room idea and saying, prices more readily so that we can actually get but we could do all of these other things. And
22 frankly, the reality is, that’s what happens. It’s lights are going out. I just don’t think that’s going happening right now. If you look at, again, to happen. I think that at some level, yes, as distribution level prices at the utilities, yeah, things get tight you see prices come back up, they’re starting to take up that head room. The we’ve seen that in Texas, that was on Speaker 3’s natural gas utilities are very active in this space: slides, so some of the cure for low prices is low Oh, the natural gas prices are down so your gas prices. But again, there’s the possibility and bill is down so why don’t we invest, you know, there’s the probability. Yes, the natural hundreds of millions of dollars or billions of possibility is in your question. The real dollars in infrastructure renewal? At some point, probability of that happening, I think is low so again, it’s not our job to just keep thinking up that’s just kind of the way we approach it. ways to spend consumers’ money. How about we just take a break on that for a while. And again, investments will be made, consumer preferences will change, distribution level usage Moderator: In the back? will change, storage will come into play, a lot of things will happen. And I don’t mean to sort of Question: Can you talk about reliability for a shush over minimizing some of the challenges as second? In particular, the thesis that we don’t we look forward from some of the new state level need to address low prices right now. It seems renewable requirements. These are going to be like there’s an assumption built into that that challenges that we have but at the end of the day, either the lights will stay on or that consumers do we really think the lights are going out? No, I will be fine with lights going off and letting the don’t think so. market respond. Is one of those assumptions built into your thesis or just can you speak generally Moderator: Other questions? We used up your about how you view reliability in this context? coffee break. Ashley, turn it over to you.
Speaker 4: Yeah. So I don’t think reliability has really ever been an issue because we have the General discussion. engineering knowledge to meet and address that. I think that’s going to be the case going forward Moderator: So that was a tremendous so I’m not hugely worried about reliability. presentation from all of the panelists and now That’s what we have RTOs sitting out there, for let’s try to unpack some of that in a discussion. the most part, NERC, RTOs, we have a huge infrastructure set up to make sure that the lights Question 1: So thank you to the panel for their stay on and I think that they will. I think that presentations and I particularly want to reliability argument becomes a foil, again, to go, emphasize a point that Speaker 3 made along the wait, here’s a theoretical possibility, we should way about the Texas, the evolving Texas spend some money to avoid it. How about we experience which is when the initial debate took walk forward and wait for NERC and the RTOs place about the operating reserve demand for to tell us that we have an actual reliability urban scarcity pricing, it was in the context of, problem and then see how things get addressed? should we do something or should we have a capacity market because we have an impending Again, there’s an awful lot of variables at play. I crisis of low capacity and we’re not going to be just don’t buy into the notion that all the able to meet the requirements for load and all that generation is going to leave the system and the stuff. And they went through this long debate and
23 then they decided to go with the operating reserve today are better at balancing marginal benefits demand curve and not to have the capacity market and marginal costs rather than just trying to keep and then the next year, the impending crisis was short-term prices down? delayed a year, but we’re going to have a crisis the next year and then the impending crisis was Respondent 1: Well, I do recognize that for delayed a year and so on. So finally, this summer purposes of tongue-in-cheek abridged stories, we started to get something where prices actually low prices is sort of the bottom line and I do went up in a way that I think is actually understand that markets are about creating instructive and quite helpful. mechanisms that lead to efficient outcomes. But we still like efficient outcomes that are tied to low There are a couple of points in that story. One is, prices so I’m just going to say that. Let me touch we don’t know what’s going to happen so a lot of on that in two places. these attempts to forecast precisely what the outcome is going to be and then do a lot of One, yes, we are extremely concerned across the mandates around the outcome are going to get us board about the various mandates that the states in trouble whereas if we get the structure right, are coming up with and some of its solar, then the market responses will be appropriate whatever they are, we are concerned that things given what actually happens as we evolve. I think are going to turn around to be stranded costs or that experience is extremely important because it the resources that we’re building are going to gets to another point which is the actual question strand assets that are not stranded at this moment. which is the goal, Speaker 4, is not low prices and That’s a concern I didn’t really touch on. So we the goal is not high prices, the goal is prices where talked a lot about the third of the states that said, marginal benefits equal marginal costs. I don’t “Yeah, let’s do that.” There was the second third know whether that’s low prices or high prices. of the states that said, “No,” and they’re kind of in the middle of the country. And they did come So when they had too much capacity in Texas, around to markets and they did come around to low prices were the answer, they weren’t the creating RTOs, MISO, SPP, but they’re still problem and when they don’t have too much vertically integrated and they’re energy markets capacity, higher prices are the answer, they are only right now and they’re allowed or able to do not the problem. What I’m worried about and I that because there’s just a lot of ills buried and wonder, I should think you would be more retail rate base, and I think that that is going to be worried about today, is the story you’re hearing an issue going forward as there’s a larger and here about the impending deluge of future larger disconnect between what’s getting stranded costs and who is going to be paying for dispatched and used in the market and what is those stranded costs. I don’t know which of the sitting on utility balance sheets in those vertically mandates that we’re imposing is going to turn out integrated markets. We’re going to have a big to be the bad one, but I’m quite sure that some of discussion about stranded costs there. them will be and then we’re going to have very high stranded costs and it’s going to redound, the So, yeah, stranded costs is a big issue, both what customers in the end are going to argue that they is sort of sitting on plates right now and how we, should be paying those in situations where it’s not I guess to say it bluntly, how we keep decision a market choice and not a voluntary choice. How makers from, again, stacking up and using the are you worrying about that problem and trying head room. I don’t know where Abram went, but to make sure that the decisions we’re making using that head room to come up with a lot of new
24 decisions that will ultimately rebound back to different. We have, in some respects, sort of split states and consumers and a new form of stranded apart a little bit more so you have a very, very costs. So I don’t have an answer for how to solve proactive green set and then sort of a set that’s the equation but I will tell you, yes, it’s very much not. So we don’t even talk about our global a concern in terms of what states are doing and warming resolutions much anymore even though how we’re stacking these up. But I can’t solve we do have them, they do exist, and I can tell you that problem for them. I don’t know if that’s a that they exist. I’d love to get there to be honest good answer but – with you, but that will take some uplift from the membership and as we know from the Questioner: If I could follow up just, let me experiments that are the states, that’s hard to pull suggest an example of an answer which is, off across the board. I agree with you though. mandating certain technologies because we think they’re desirable is quite different than imposing Respondent 2: If I could arc in. So I think New a carbon tax and a price of carbon to attack the York is an interesting example on this point. thing that we actually find undesirable. And the Right? So the NYISO has been considering connection between the two is weak and so you implementation of a carbon price within the ISO don’t know what it is that’s going to substitute for market and have been doing a ton of work on that. what. California is already experiencing The state has now passed 100% clean and, well, renewable substituting for renewables so that’s a the whole CLCPA is a broad swap, but within the policy position for your group. We like carbon energy sector 100% and by 2030, 70% taxes because that actually targets the problem renewable. Now New York is already 30% that we’re going to have to deal with, it doesn’t nuclear, so by 2030 they will be at 100% clean. create stranded assets, it poses the risk of the They don’t have to phase out the remaining fossil market players who are participating to respond until 2040 so that gives a little bit of a trajectory. efficiently. So I’d like to come out of this meeting with you happy. [LAUGHTER]. So in the context of CLCPA implementation, there’s a very live question in the Cuomo Respondent 1: Well, I’ll tell you this, I do have a administration as to whether or not the state wants masters in economics and I’m right there with to pursue the carbon pricing kind of program you. Yes, let’s pick the first-best solution, but we through the NYISO. So the collective us should all know that regulation doesn’t do that. I would all be pushing for that. This is a very tangible, a love to have my membership overall come to that very near-term opportunity to establish a conclusion, but that’s just a hard thing in a meaningful carbon price within a wholesale membership-based organization to get so that I market that can help rationalize some of these would be able to sit here in front of you and say decisions which the state is going to have to make this. It’s sort of a fascinating thing. in the very, very near term and we should all be pushing for it. Now I say that because we’re We actually have, as an organization, we have supportive of market design. We receive ZECs two, not one, but two global warming resolutions. in New York and the carbon price is going to be Our first global warming resolution was in 1998 an offset to the ZEC because, as was already as an association. But I have to tell you the mentioned, it’s not going to help us economically membership is really much different now, my but it’s the right thing to do. members being sort of the state office heads that are either appointed or hired, and it’s very Respondent 3: And I’ll add, part of the reason
25 that I express such optimism in New England to at the cheapest price. I was wondering if you try and driving carbon pricing is less because we thought about whether we’re taking us backward see it from a regulatory standpoint and more we with that kind of framework? see it from a political and a legislative one. Where in the six states of New England, three out Respondent 1: Well, no. I think there is a of the six governors are Republican but all twelve decentralized market construct that can work to of the legislative chambers are Democrat and a achieve both decarbonization reliability and number of them, over the last year and a half to economic goals. Texas is the closest and I think two years, have moved pretty aggressively on that they’re a legitimate choice for any state would be end. to do full retail competition and the retail electric providers have the job of serving whatever end And as we now start to see a focus shift from use customers they sign up to serve. And those decarbonization on the generation front to customers need not only whatever clean energy transportation and home heating, I think there is they may want or be directed to need, but they a window of opportunity to look at a much more need power 24/7, 87/60. So they’re going to be broad-based approach to this with carbon pricing looking for contracts to serve those customers, so being a key component, although as I said, in my long-term PPAs with whatever generators, in earlier remarks, not the single policy driver of this Texas that’s probably going to be gas generators, overall. So I do think there is a potential independent power producers there. movement there, although that conversation will shift in what in New England has been primarily And my understanding is, even in PJM where you with the governors and the regulators, I think, have the three-year ahead central capacity more into the political and legislative realm market, that there are a lot of bilateral hedge which then does create more uncertainty and contracts that most gas generators rely on those, more variability but an opportunity nonetheless. not just the three-year capacity market because that gives you one year but they’re financing the Question 2: Hi. Thank you. I had a question, generation on the bilateral contracts that operate Speaker 3. So it really goes around the discussion completely outside of the PJM market. So you’re you sort of started with this model of having more financing generation of carbon-free and non- bilateral contracts, so one observation, and it’s carbon-free power and in ERCOT style and certainly clear you have bilateral contracts in capacity market style regions with these bilateral some of these instances that you were showing hedge contracts that are operating outside of the but I’m not aware that there’s really been much RTOs. And that’s the way generation gets bilateral contracting for dispatchable assets in financed. ERCOT where we’ve had bankruptcies. But then probably more importantly, going forward, if the Moderator: I’m going to come forward first and utilities have to play a larger role, which you then go back – suggested, isn’t that really sending us back toward where we were? How would we make Respondent 2: Before we leave that, just real those decisions when most of our standard quickly, and I just want to sort of throw this out service frameworks really are short-term and there, it’s more observational, but I think that’s most states don’t, in my observation, they just good academically but in the political reality on prefer to have the ISOs kind of handle it and then the ground, Connecticut, New York, I think they free ride on that, getting it, I think they think, Massachusetts or Maryland, there’s a huge push
26 for legislature to remove at least the residential On RGGI, I wanted to add that, and I’m on the customers from marketing, from the third-party board of RGGI, I want to add that when you hear supplier reseller markets. They, some states, and the RGGI board members talk about carbon it’s not across the board, but some states have taxes, generally speaking, there is a reluctance to judged that that has just not worked out well for go forward with it because there is satisfaction consumers. They’ve paid more than standard with a known known and what you can get out of offer service. They’re targeted marketing toward RGGI as opposed to states coming up with low income and less sophisticated customers different variants of carbon taxes. We’re not which has led to problems, and so they’re actually trying to talk about a national carbon tax. in the process of trying to get rid of it. Again, it’s a political question as opposed to an economic But a question for Speaker 3. There’s a revenue question. But it’s one thing to say, we should go sufficiency problem that emerges for our T&Ds forward with an ERCOT style thing but in the if you carry forward the concept of distributed reality, there’s actually a lot of states that are generation where distributed generation locates at pulling back from that at this moment. the most profitable points on the grid. They’re not going to go into deep rural areas where there’s Respondent 1: And I’ll just say, again, that’s high cost for them as there is for any other another from an RTO or FERC perspective, like, provider. They’re going to be in urban centers, that’s another legitimate state choice. And it’s industrial parks and so forth. How would you understandable, I think, to anybody that you address that in your approach? might make that choice. There again, you still need to make sure that somebody is procuring Respondent 1: Well, I think the wholesale market power on that load. I mean, I think it does kind structure approach can operate independently of of send you down an integrated resource planning that but I don’t work for anybody else so I can type of function. You have to think about getting just expound on whatever the heck I want to so I power all the time but you can do it in a much might as well. You know, I would say this is a more, I did say, competition-friendly way than distribution, a regulation distribution utility the past. You don’t have to have a utility question and state PUCs have to answer that planning do it, you don’t have to do anything in question of essentially cost allocation for rate base, you can have competitive procurement distribution investments. There are definitely for serving that load, you can make sure the going to be increases in distributed energy suppliers are unaffiliated with whoever is doing resources so we’re going to have these questions the procurement, all these sorts of things. So you whether you have net metering or not. I guess I could have more of a competitive procurement would say that almost all owners of distributed type of competition as opposed to full resources still use the grid and probably use them decentralized on both the supply and demand about as much as they ever did. side, but you can stay decentralized on the supply side. I have solar panels on my house. I still use the local distribution wires as much as my neighbors Question 3: Thank you. A couple of comments. do. So that’s a choice that PUCs have to make First on the retail competition and dissatisfaction, and there’s a lot of complicated analysis about you could add Maine to that list where it’s being hosting capacity and that sort of thing and who questioned seriously because of the overcharging benefits by how much. But that’s a good thing and under-competitive behavior, you might say. we have PUCs to make those decisions because,
27 again, the distribution system is a regulated I wanted to just kind of drive that point home with monopoly and they have to figure out what the example of Texas. And I know there are folks investments are needed and how to allocate those from ERCOT here so if I get it wrong, just tell costs. me. But in ERCOT, there is centralized decision making, as everybody here knows, about what Questioner: My concern is the impact on other transmission is going to be built, centralized customers left on the grid if there are political planning for transmission, and the costs to preferences given to more favorable conditions recover based on a 4CP cost allocation for DGE developers. The other customers pay. methodology. And what this means is that there are lots of people who provide sophisticated Respondent 1: No, I hear you and that’s the net services to industrial customers down there about metering debate and all that. And I certainly when the 4CP periods are going to be. And the personally have sympathy. I don’t want lower 4CP customers have behind the meter generation income consumers of my utility to be left holding and can get off the system when the 4CP hours the bag for what the wealthier people are able to occur or potentially occur that will determine do with their solar panels. I mean, we need to their cost allocation for the next year. allocate costs in a fair way. So there is the incredible potential or ability for Respondent 2: Just to chime, I mean, to chime in industrial customers to avoid allocation of on the Exelon, put on my utility hat, you know, transmission costs that have been built and are that is the concern with the net metering intended to be socialized across all customers programs. who are benefiting from the generation that was enabled by the new transmission build. The other Question 4: This is just getting back to the point obviously is that the industrial customers conversation that we started about transmission. have a fairly flat load profile. They are I’m a little unwilling to move away from the issue generating many, many hours from the low cost of carbon and carbon tax because I’m all for it and energy being integrated into the system from the I think it’s important for this group to discuss that. new transmission build, and the costs of the new transmission are not being born. But I wanted to return to some questions about the connection between transmission investment This is relevant to consumers and this issue is and going for a deficient investment in very pertinent to equities among different generation. And I think there was a view consumer groups and how you deal with those expressed that we were kind of getting off topic equities. And I guess the question for the panel with raising that issue and I don’t think it’s off is, in light of these kinds of problems and their topic because I do think that continued deficient impact on consumer equities and on transmission, investment in generation depends very much on efficient transmission buildout, have you what we do in terms of transmission policy and considered how transmission cost allocation how the policies are made about what might need to be changed in the future? transmission is built and who pays for it because as you all know, the transmission that’s built can Respondent 1: I’m always a sucker for these favor generation located in certain areas versus things. I’ll jump in. You make a great point. I generation located in other areas. do think transmission and generation are inseparably connected. And as the last question
28 indicated, the cost allocation is usually the providing these services in a way that ISOs could hardest part of the regulated sector, so both actually rely on them to be providing reliability transmission and distribution. However, what are benefits. Any comments on the role? we at, 100 years of public utility regulation? Wasn’t it Bonbright who laid out the original Respondent 1: I’ll take a stab. As the Moderator regulatory cost allocation principles? John, I see mentioned earlier, and again putting on my utility you in the back smiling. You know, there’s sort hat, the utilities are in their own kind of era of of an art and science to how you allocate costs of transformation. And so within the Exelon family highly capital intensive natural monopolies. It’s of utilities we have what we call the Connected not all science. It’s not easy. There’s not a simple Community Strategy but essentially it’s the formula but there are principles about how to do evolution of our systems to a platform-based that, and I don’t think they’ve changed. model where we understand in a more clean system we are going to have more distributed I think if you asked Mr. Bonbright about your resources on the system. The nature of our case, he would say, “Well, that’s the wrong rate systems at the distribution level are going to design for that particular sector and you need to change and that’s going to have corresponding change how the rates are recovered to reflect a changes at the transmission level which takes us more fair allocation.” So again, we have to all sorts of fun rate questions like was just important work for regulators to do, both state raised. But it’s undeniable. I didn’t mention and federal, but I don’t think the fundamental sort them because it just wasn’t what I chose to focus of economic policy has changed for those. on but we will have a more distributed future, There’s how much do you build and who pays for demand will play a more active role and that’s it, questions that regulators need to decide. incumbent on us to enable that as at least from our perspective. Question 5: So I guess there’s actually a lot of consensus about where we’re heading in the Respondent 2: And I will say specific to New markets in terms of at least needing more flexible England, we’ve seen a bit of an evolution on that resources, being able to balance the system, front in that I think about a decade ago we saw dealing with ramping requirements, having these the exuberance around demand response and intermittent resources, and how do we face that playing a larger role. That’s really been pulled challenge. back and instead what we see playing that larger role is both energy efficiency and a tremendous I didn’t hear much discussion of the role of a real spend at the state level to drive that, having an active participation of demand response in a impact on then the amount of capacity that we end physical way in these markets for providing some up having to buy through the capacity market and of those kinds of services and I wonder if we’re then what Speaker 4 raised before the break of sort of operating on an original technology or role storage and creating that as that customer phasing of the RTOs in facilitating active participation at approach and integration. the distribution at the state level, at the retail level, in the wholesale markets by demand And so it doesn’t play that same traditional role response in order to solve some of these problems of DR as how I think we’ve all thought about it in because, while there are lots of investments in the wholesale market but it starts playing a very demand response, it doesn’t feel like the market similar function collectively. And I think that design that we have is geared to actually clearly is where a lot of this is going and we’re
29 going to see more of that customer the gap with market design that incentivizes empowerment, although I do have questions active physical demand participation and sends about what is going to be the overall peak impact the right price signals so the demand response of that in a place like New England where would be involved. Because I think the market certainly we still are a summer-peaking system design is actually heading in the wrong direction. but it has been discussed ad nauseum we see the most tightness on the system during the winter Respondent 3: I agree with you. There are 31 months. flavors of demand response and they all have their own sort of nonconvexities and capabilities, It’s in those periods of time where particularly just like different generator types do, so I think most of the distributed solar is co-located with there is a market-based answer to this one too. solar and it’s hard for the solar to operate under a I’m hoping part of the postmortem of ERCOT foot of snow on cold cloudy days. And to what 2019 shows that retail electric providers found degree will we see performance from those more more and different creative ways to manage the distributive storage resources in that type of a load that they are serving in offered incentives or situation where it’s a seasonal issue, not an annual whatever it is or they all had Nest thermostats and issue? Annually I actually think they perform they were controlling remotely. very well in New England but in those seasonal periods, how does that function? That, to me, is Whatever it is, there’s room for a deal there. still a knot that hasn’t been untangled specific to They saw the high prices coming. The electric my little corner of the world. providers would have to pay it unless they managed their load or bought new supply and Comment: Could I just comment on that because there wasn’t much new supply to buy so that’s I think it illustrates the concern that I have is that how it would work in a competitive environment demand response has sort of been conditioned to and there are many ways to do that. And the focus on being a capacity market resource and homeowner, itself, doesn’t have to pay attention energy efficiency in response and so all the to prices. You can have your provider do all of demand response they’re developing, because that. we’ve institutionalized these excess reserve margins, with the capacity markets, you’re not Question 6: Speaker 3, a question for you about really getting either the scarcity prices or the high PPAs. Today, just in terms of normal hedging, prices either for the fundamental reason you have there are intermediaries, Wall Street banks, who too much or just the problems with the market will buy up everything a generator can put out in design around price formation and you get this what I’ll call long-term PPA and then they’ll dice focus of distributed generation or demand it up and sell it to retail suppliers in whatever the response being in the capacity market. appropriate timeframe that the retail suppliers want. And to me, that is where the market design challenge really is, to be able to shift to a place Is that the model you’re envisioning for where it can really be a resource. And I don’t renewable? Because I think what might be think that should be incumbent on the utilities to confusing is some states in the past have ventured do that and put that in rate place. I think it should into requiring retail suppliers to enter into be incumbent on the state regulators and policy physical hedges with certain selected resources to makers and the ISOs to figure out how to bridge meet their policy initiative and that seemed to run
30 afoul of retail competition practices. So I want to possible that by taking a second look at our Edgar just make sure that you can clarify for the and Allegheny requirements, that we could get audience what you mean. out of the state’s way for achieving its public policy objectives? And Speaker 2, I don’t want Respondent 1: Sure. Well, I don’t know that it to make you feel uncomfortable now that you’re matters so much what I think but it, I’m saying at Exelon, I realize your company took a contrary that in this presentation, there is a market-based position in the Ohio case but maybe is it time to model that can work for decarbonization and all rethink that? the other things. You do have to internalize the externalities and do a number of other things but Respondent 1: It’s live in the FRMOPR you could have as part of that model, voluntary proceeding. bilateral contracts that lead to long-term PPAs that finance generation. Questioner: What’s that?
Now, again, ERCOT is closest but it’s not fully Respondent 1: It’s live in the FRMOPR there. We don’t have a, you know, fully sort of proceeding, so the issue was raised in that docket. working model to point to. Outside of ERCOT, God, sorry. [LAUGHTER] We raised the issue there’s market imperfection on top of market in the docket so, sorry. [LAUGHTER] imperfection so I can’t say what any given state should do from where it sits but certainly if I Questioner: Well, thanks, anyway. mean it is a state’s choice to choose what kind of [LAUGHTER] resources and how they get it, so I guess my main point there is it’s not really the RTO’s or FERC’s Respondent 1: Read our pleading. EBSA did business to tell them how to do it, that they can have something to say in response. do it either way and just come into the spot [LAUGHTER] market when you want to sell or buy power on the short-term basis. Question 8: I guess my question is probably a little bit more higher level. I think this debate has Question 7: Thank you very much for that been happening for the last, I don’t know, has question, because it’s almost exactly what I was been 15 or 20+ years, I think the fundamental going to ask but I’m going to ask in a different question is when we delegated markets, there was way. Also, thank you for your presentations a set of market principles that led to the creation today because, although they’ve been very of the markets and every time, whether state informative, there’s many things I’d like to ask intervention happens or some other intervention but can’t but this one I’ve just checked on our happens, the market rules change and that slowly website to make sure it’s safe. You’ve talked creates some kind of stranded assets for the about bilaterals, you’ve talked about state policy market participants. requirements, you’ve also talked about the need to have creditworthy buyers and I want to try to And I think the question over there, you know, pull some of these threads together by asking this whether, Speaker 3, your solution over there is question. bilateral contracts, that’s great but now you’re going to leave and then you have residual margin This case is now, as far as I understand it, of, in PJM, 30% or in other places where you absolutely dead on the FERC dockets but is it have no other than 10-15% residual margin, the
31 bilateral contracts will leave some people not elements. And I think the tension and the struggle participating in the markets. that has come out in this discussion and in the discussion we’re having with the audience is So what do you do with that? Are you going to there’s not a great single answer to it and we’re let them say, you know what, now you’re going trying to muddle our way through and figure out to participate in it or are you going to give them a what are the best ways to internalize costs and standard stranded cost recovery for them because then design market-based products around that. they entered the market on a set of principles. I But that’s the way that I think about what we’re think the problem with any of these approaches, trying to unpack. and this is probably my opinion, I’m not going to argue with any of this, is either you play in a Respondent 2: And I was just going to add, there regulated space where you have a cost base is a workable market-based model and in that recovery or you go in the fully market space and model, yes it does rely on buyers and if you’re a don’t let the markets change. You create a market supplier who doesn’t have a buyer, that is your principle, don’t let it change. Every time you let job in a market to go find the buyer. And I think something change, there will be some creation of there’s been a lot of confusion in restructuring, stranded assets. It might not be big but at some thinking that the RTO is the market. And there point it becomes bigger and bigger. are market monitors at the RTOs who say, when you go out and sign bilateral contracts or So what are we trying to solve? I’m still puzzled whatever, you’re going outside of market. And by this. Are we trying to solve whether the it’s like, where did the RTO become the market? original market creation was a good idea or a bad Yes, they’re running a real time spot market for idea or are we trying to solve, what is the ideal longs and shorts and they’re kind of the air traffic market principle? controller.
Respondent 1: So I’ll take a first crack which I And if you’re going to do that, as Bill taught us think goes back to some of the prior discussions all, if you’re going to do that physically, you of the first-best choice is, I think, where you’re might as well do it through an auction-based getting at, either we go to a fully regulated system to be more efficient. But they’re not your environment or we go to, essentially, a peer- customer. We were trying to set up markets when based market-based environment. Tony Clark, I FERC and many states did this and Congress know he spent a lot of time coming to New passed EP Act in ’92 and markets rely on buyers. England and other places making that exact So the job when you go into a market is to go find argument. I’ve made many of those similar your buyer and if you’re the supplier that wound arguments in the past and yet, the reality of what up without a buyer, it’s kind of musical chairs and we have is that imperfect second, third, twenty- you got left without a chair. And you were fifth best choice, it’s going to be a mix. supposed to go find them.
We’re going to be half-pregnant for a little while Respondent 3: I guess I would just throw in, in and I think the challenge we’re struggling and the the real world and real markets, things change; fundamental question we’re trying to answer is, tax law changes, policy changes, things change, how do we create a durable sustainable structure some people win, some people lose, losers go out in which we have both market-based elements of business, their assets get sent into bankruptcy and a high degree of regulated cost-based and possibly bought up by somebody else and
32 reused in the market. There’s a whole efficient on the consumer side are kind of a little skeptical sort of system out there for doing that but for that it’s ever going to work that way. And some whatever reason in our own system, it’s kind of a of that’s, again, not the market, it’s not FERC. I no-losers adventure. We seem to keep finding mean, a lot of that ends up happening at the state ways, which was sort of the point of my tongue- level, because governors don’t like a plant to in-cheek version of how many ways can we make close down and don’t like jobs going out of the consumers pay to get the market to work and system and things that technically shouldn’t be produce low prices, even if that’s not exactly the within our market framework but, politically, right answer. they are. But you know, again, that’s where consumer costs start adding up. But you know, in the real world, people lose money. In this world, people, if they lose money, Respondent 4: I have to jump in, if you don’t they like to go to the state legislature and get a bill mind. Iin New England, 70% of the generation passed or get a ZEC passed or get a change in the post restructuring went bankrupt, 70%. When market. There’s no way that this market, that this NEPGA was started, it was four companies and whole sort of adventure proceeds 10 or 20 years then it was 19. Most of the companies don’t exist into the future with the changes that are going to anymore. There’s been M&A activity, some happen, that there aren’t going to be losers, that have closed, some haven’t come back, we don’t plants aren’t going to close, that money is not like coal in New England so that’s pretty much going to be lost. gone.
If we keep trying to protect everyone from losing And so people did lose money, but that risk was a little bit of money in these markets, then you on the power producer, it was not on the end up with responses that somehow keep customer. Markets did what they were supposed layering charges on consumer bills and that’s not, to do there but whatever happened then, now you you know, I’m always amused, and it was even in have a different, a whole different paradigm. And the New England slide that Speaker 1 had about I said this earlier in my probably boring opening the New England commissioners all say, there’s remarks, but I was never a fan, back when I always this word, affordable. And every time represented customers, generators, or even as a they make a statement about whatever is going to regulator of PPAs but that’s what we have and happen, we’re going to do what’s going to be that’s what you have to do. And you’re not going affordable, we’ve got to, we’re responsible for to be able to discount what some of these states affordable energy. But there’s no actual bounds are doing. You know? And this comes from a around what affordable is. Nobody has actually state that has the largest clean energy defined it. It can be any damn thing you want. It procurements in the country, if the feds would get could be three times what it costs today. Is that the hell out of the way, for offshore wind and still affordable? I don’t know. We just keep hydro to bring in. And this is a state that puts their putting charges on the consumer bill. money where their mouth is. And we argued and we fought with ISO and the ISO board and FERC So, at some point, yeah, find the structure, find and those were wonderful discussions. the thing that’s efficient, let the chips fall where they may. The utilities may lose some money, But you’ve got to find a way to bring them in and you know, the marketers may lose some money to work with the states. And I am an eternal but that’s the way it’s supposed to work. And we optimist that, if there’s any region in the country
33 that’s going to figure this out, it could be New So I’m not denying the fact that you’re finding England. But what it looks like is not going to be that the twenty-fifth solution or what if it’s not the what it looks like today because it’s flat load first solution but I think we’ve got to realize that growth with all the investments. And on the DR that is the mode we are operating under and side, there’s been a ton of investments in New you’re never going to have a perfect market in England in that area and I think the ISO this space. So you know, that’s all, I wanted to recognizes that. The forecast of what’s needed is make that point. lowered all the time because of energy efficiency and stuff going on behind the meters. So they are Respondent 4: I would ask, is there a perfect looking at it and they are doing what they can. market anywhere? Or has there been?
I don’t envy ISO New England for trying to Comment: Well, it’s an unfair question because juggle all this and keep the lights on. I don’t envy we know that we’re balancing many different Speaker 1’s members that are trying to, you objectives at the same time. But I do think the know, is there enough money because you’re difference between second-best and twenty-fifth going to need some of these traditional resources, best is worrisome and we could do a lot of these including the nukes, to keep the lights on. And things a lot better. So, for example, Speaker 3 you know, what are we 24% nuke in New mentioned the basic generation service approach England we’ve got two huge plants left. And so, in New Jersey, which other states do similar kinds you know, I don’t know what the magic secret of things, but that’s, and he made a slip of the sauce is here but the states are in this game now tongue and said we can also go to full integrated and they’re in it in a big way. And I’m not sure resource planning, but that is not what that does. you’re going to be able to, you can’t just say no. As a matter of fact, what it is, is a three-year rolling contract for delivered energy. Questioner: Oh, I wasn’t denying that at all. I think the question is – The regulators in New Jersey have no idea where the energy is coming from nor do they care, and Respondent 4: No, I didn’t mean to suggest that they’re not managing the construction of those you were, but that’s a different player than it was power plants and doing all that kind of thing. And 10 years ago, I think. the people who are competing in that contract are turning around and then hedging through various, Questioner: Yeah, I was only trying to and some of them are the financial entities. And distinguish a true market, like I think Speaker 4, all of that is built upon the bedrock of the short- you mentioned about that, every other market, term spot market in PJM which you couldn’t do commodity market, for example, the supply if you didn’t have the short-term spot market, demand forces are pretty much uncontrolled. then you would have to worry about where is this Here, for whatever reason, the supply demand power coming from and all the other kinds of forces are controlled. Like for example, energy things that you get into. efficiency mandate for example, the demand is controlled. You’re artificially interjecting forces I think we could do a lot better than we are doing into the demand side of the equation and supply in many of these places and I think we’re shooting out of the equation so it’s truly not going to be at ourselves in the foot in New England and I think market as you want it. we’re going to be really unhappy later on, particularly in Massachusetts. Me, I’ve got my
34 own pictures of my neighbor’s solar rooftop another part of the demand side of the equation, things that I’m paying for, and so I think we can which is electrification of transport and buildings. do a lot better. We’re doing better in some places There, you’ve got the potential for behind the but it’s amazing how difficult it is to make these meter energy storage and I’m just curious about improvements but I think they’re eventually asking the panel to speak to how market design coming. And it is a bit of a race. I don’t feel like can help make those other pieces, perhaps of I’m winning, but I do think I’m very worried decarbonization policies in the states and maybe about certain regions of the country, particularly broader later, happen in an efficient way. where I live. Respondent 1: Well, you probably find a lot of Respondent 5: If I could just add, I think we’re fans for electrification and EVs, and integrating circling around, if we had a meaningful price on that into the wholesale power market certainly carbon in the markets it would address a lot. Take would be great for the overall renewable and your point that a lot of the changes to date have clean energy portfolio which, I think, RFF is been really policy driven in a different way. working on as well. Market design-wise, I think Regulators have to decide what resource one interesting thing we haven’t gotten into today adequacy is and then you can say, in Texas, well is how much assurance does a grid operator need we don’t do that, we let the market decide but the how many hours ahead of time of its kind of load ORDC does it. Somebody is deciding that. generation balance?
And so there’s a certain level of market And you could say from a renewable perspective, intervention that’s going to occur just by setting I’d like to say we don’t need day ahead markets up the very structure of the market. And then you because those were designed for the particular layer the carbon reduction piece on it and I don’t engineering features of fossil units. And with see how we get out of the struggle, the issues that wind and solar, you have a really good wind solar you’re struggling with. A meaningful price on forecast four or six hours ahead of time, so let’s carbon we get, it is a very long way there. just go to kind of hourly spot markets like that. Hopeful, maybe glass half, it’s not quite half full But on the other hand, if you think about the anymore. And so we’re going to be in a world flexible sources that the grid operators need all where states are pursuing policies that are, the the other times, think about this building, there’s preference would be they be technology neutral a lot of heating and cooling load in this building but the reality is that they are not. You can kind that they can actually plan for six hours, twenty- of throw a stone at ZECs. TMI just shut down. four hours, thirty-six hours ahead of time.
It’s going to take 12 years of Pennsylvania’s The same for electric vehicles, you plan for the AEPS Tier 1 build to fill that emissions hole that charging and somebody on behalf of the EV was created. IT was a decision by the state. Other owners can be telling the system operator, here’s states are making other decisions. And we can’t how much I’m going to use or going to need a day deny it, we can’t avoid it. Think to the point that or two or three days ahead of time. And I’m told was made, we have to figure out a way to achieve there are a lot of demand side sources that would the greatest level of efficiency we can within very much value the ability to have, like, a multi- what we’re given. settlement system one, two, or three days ahead of time in order to voluntarily sort of lock in that Question 9: Hi. So I have a question about resource and plan. And you might see a hot date
35 coming up and you can actually cool the building models and what that’s going to look like. And ahead of time and that sort of thing. So I think one of the big issues that was raised there was the that is a very valid thing for market design. implementation questions that California has worked through and having aggregators on the We’re probably a ways away from that because system interacting with the wholesale market. we already do have real time and day ahead markets, but there are questions, I know in ISO Each RTO is going to have to learn through these New England and its energy security process that issues of what’s the visibility going to be, what’s Matt White and others are working on in terms of the relationship and accountability between how much and how far ahead of time does the what’s happening on the transmission system and grid operator need resources locked in. MISO is the distribution system aggregated over what looking at that three-day ahead market and I think nodes and, so a lot of mechanical stuff is going to it’s coming up in PJM’s field security discussion have to have problems identified, solutions as well. So I think it relates to the demand side developed and then implemented, and that’s just as well in terms of this how much and how far going to take time. ahead of time should grid operators lock in resources, at least financially lock in. I’m not I think, at least from our perspective, we’re there saying do make whole payments. and we believe we should be working on this stuff but they’re not easy and just to have that type of Respondent 2: Another thing that I would add is aggregated distributive resources immediately mechanically, so I think your question assumes or participating in the wholesale market because presumes the ability to aggregate a significant they want to get that wholesale price, that market amount of resources on the distribution system in signal without all of the necessary coordination in order to bring them up to the wholesale market place, makes us nervous. and there’s an open rule-making proceeding at FERC on this question on kind of participation
Session Two. California Electricity Crisis (2000-2001): Legacy and Lessons
According to Wikipedia, “[t]he California electricity crisis, also known as the Western U.S. energy crisis of 2000 and 2001, was a situation in which the U.S. state of California had a shortage of electricity supply caused by market manipulations and capped retail electricity prices. The state suffered from multiple large-scale blackouts, one of the state's largest energy companies collapsed, and the economic fall-out greatly harmed Governor Gray Davis' standing.” Around the world, this experience is cited as anything from a cautionary tale to an outright dismissal of the viability of markets for electricity. The costs were enormous, and the reverberations continue to this day. Yet both the “truth” and the “facts” remain controversial. Was this as simple as inefficient pricing (In February 2001, California Governor Gray Davis stated, "Believe me, if I wanted to raise rates I could have solved this problem in 20 minutes.")? Unexpected scarcity? Market manipulation? State and Federal regulatory responses at the time were conflicting and sometimes counterproductive. And the conditions extended well beyond the borders of California. What have we learned from this market and regulatory design experience? How
36 does and how should this experience inform current and future policy with respect to markets and the electricity system?
Moderator. summer of 2000. Now we’re in the record books. Well, we’ll go ahead and declare liftoff here. So, I’ll give you one more story about the passage of one thing should be apparent. The passage of time and then I’ll click on my little slides. I’m almost 20 years is indeed enough to render any ex going to be brief because they have a lot to say. parte concerns about the California Energy Crisis I’m going try and just be entertaining, but I’ll moot. [LAUGHTER] I thought about this. I have you know— and it’s too bad David Rask is thought about it when I lost the 9th Circuit case not here, unless he snuck in— that during the first in 2016. There’s a few dribs and drabs. Trust me two trials and Joel Newton, now ex-Donahue is they’re not coming up here. I’ve also been my client for the first one, my paralegal was a thinking about what the hell was I doing in 1999 great lawyer and friend of mine named Denise and 2000? Buffington. We hired her from Steptoe. Between the time of the second and third trial in this long The crisis started, I want to say May 10th, 2000, running saga, she went to law school. She came was generally the day everyone pointed to. And and worked for us as an associate and then she that was just after we discovered Y2K did not went in house at Great Plains only to discover that actually end the world as we know it. Great Plains had acquired a long defunct energy [LAUGHTER] Bush beat Gore happened. trading firm called Aquila and she was back in the Nobody counted chads in Broward County. 9/11 middle of the California refund case at which hadn’t happened. I spent some time trying to point she hired me to go do the third case. That’s figure out what my cell phone looked like how long this lasted. because I don’t know about you, but I really don’t remember two iPhones ago; what cell phone did I mean 20 years is half a career for most people. I have? So, I went online and I think I had a And in fact 100 years ago, 20 years was enough Motorola Razor except, oh, that wasn’t out until time to be a father and a grandfather. We don’t 2003. I don’t know what I had, but I know do things that way anymore, but it’s possible. So, iPhones are a lot less than 20 years old and they here we are. And let me see if I can work the AV. changed everybody’s lives completely. So, who knows who Senator Steve Peace is? Senator Steve Peace was the Chairman of the But I also have the sense that we all keep Senate Energy Committee in California and he’s litigating and fighting about the exact same things generally considered kind of the godfather of AB as we were fighting about way back then. Our 1890. Read what he said here because this is market’s supposed to throw off net revenues, net market manipulation writ large actually, contributions to margin that over time on average, particularly the last part. It’s fraud in connection approximate long marginal costs. Maybe not as with FERC jurisdictional transactions. It was a it turns out. What did these markets do anyway? bet most of the industry nationwide would The California ISO’s motto before the crisis was misperceive what we were doing in overpay for reliability through markets, as I recall. Which in power, meaning overpay for power plants. A bet the final three trials, in the California refund case, overpaying for power plants, get our consumers I put in the record, it did me no good, but it off the hook for paying your stranded costs. That seemed to me reliability markets would mean worked very well. somebody bills on market revenues. What else would you think it would mean? Well, it worked very well until it didn’t, which we’re going to hear about later today. Now, who But we didn’t win that case and the final, good knows what else makes Senator Steve Peace old dribs and drabs about fighting about the famous? Don’t say what it is, but you can raise
37 your hand if you know. [VIDEO STARTS] Comment: Aren’t you glad we all showed up? [LAUGHTER] You cannot make this up. [LAUGHTER]
And I’m just going to announce in advance, Moderator: You learn something every day. there’re eerie parallels between the plot of this movie and the California Energy Crisis. Wait Speaker 1: So, I’ve devoted a large part of my until you see what I mean. This is just for context, career trying to avoid watching that movie. so you see what happens when a killer tomato [LAUGHTER] And you ruined it. attacks somebody on film. [MUSIC] San Diego, [LAUGHTER] Well, when we were discussing ladies and gentleman. I give you San Diego, with the Moderator about this idea, which he California. The epicenter of the California assured me was now legal, or wasn’t going to get Energy Crisis. This is also the location where the anybody in trouble, it seemed it certainly wasn’t killer tomato’s attacked. Notice the high quality too early to have this conversation. And what I of the video. It’s worth it, trust me. have decided to try to focus on is the part that I [LAUGHTER] It’s almost done. hope is part of the legacy question and the lessons. The subtext here is that the California Speaker 1: Are you sure this isn’t a porn movie? ISO PX design was quote, “fundamentally flawed,” and the quotes refer to an order that Moderator: I mean what fertile mind invented came from the Federal Energy Regulatory this? And he wrote the California Restructuring Commission, and I’m going to show that. And Legislation. OK. Now keep it down. I’ve got basically, what I want to do is to advance the three more of these, but they’re briefer than that slides so that I can give my talk. Somehow this one. There, I’ll have you know. Ladies and is— gentlemen, that is Senator Steve Peace. I’m not making this up. This is actually really what Comment: Try a green one. That works. happened, but wait until you see the five bureaucrats in Washington, D.C. They’re about Speaker 1: I did. It’s not working. It’s been eaten to come up. There they are. They plead their case by the tomatoes. [LAUGHTER] in front of five bureaucrats in Washington, D.C. The people, San Diego, doom. They get Moderator: You know, at the end of the movie nowhere. I told you it was quite a lot. To some the people in San Diego lure all the tomatoes into people the California Energy crisis. Now, just to Qualcomm Stadium and stomp them to death, let you know, they could come back at carrots. because the tomatoes cannot attack when they All right, you can turn on the lights and I’ll pass hear some crazy song called “Puberty Love,” or [VIDEO ENDS] the instruments of torture to something like that. So, tomatoes just Speaker 1. disintegrated.
Speaker 1. What I want to talk about today is the run-up to Speaker 1: By the way that was one of George the California Energy crisis in 2000 and 2001, of Clooney’s first movies. He was in it as well. what happened before and what I’m—thank you. Obviously, this was a terrible situation. I don’t Moderator: Really? have to emphasize that, but there was a cloud on everyone’s horizon. I’ve encountered this all Speaker 1: Yeah. over the world. Everywhere I go, particularly, it’s less so now, but it’s happened within the last few Moderator: It’s on my iPad. I’ll have to watch it weeks in various countries where people refer to maybe, and see if I can spot him. this horrible experience and why they don’t want
38 to really try markets and what to do about it. So And I actually provided testimony at the time in it was a bad thing. We were trying to deal with a front of the California Public Commission about very difficult problem on what we’ve been how an efficient bilateral market needs a pool, through this, and I can explain some of the talk which was the terminology that was used at the this morning about the challenges. time.
But the key thing in these market designs that So this was not a new idea. It was, I suppose a we’re trying to work on was finding a good new idea in the larger concern, but it certainly is pricing mechanism, settlements, payments that not something that happened after the California would support the solution. And the lessons that Crisis. This is well before the California Crisis. we came back with from that experience were, I And as a result of the hearings that took place want to emphasize the first one here was the around that Blue Book and when the California design principal about Integrate Market Design Public Utilities Commission was thinking about and System Operations. And that in particular what to do, they came forward with their direction focuses on the RTO and the spot market, and the order instituting and about how to reform the real-time activities. And why it was important markets. And they included something which that those two things be carefully designed and I’ve often referred to it as the Ten integrated. And we spent a lot of time in this Commandments. The Ten Commandments of group talking about this over the years. So, it’s the independent system operator. And what I, not new. and the other nine of them are important, but I quoted for you here number seven. And basically We also will remember that the California crisis what it does it goes through the picture you just was not the only example trying out something saw before. So, it says we’ll have an independent that didn’t work and then having to try something system operation that will run this economic else. When Order 888 passed we had this dispatch. We’ll get these locational prices and all discussion in that document about how to that. approach the question of market design and one way to go would be to have gone to the bid-based, That was the direction from the California Public security-constrained economic dispatch story. Utilities Commission, telling the market But that was viewed as too hard and too participants to come back with the details that complicated, and we weren’t sure what was going filled in how we were actually going to do this, to go and we wanted to do something that was but here was the structure that should be adopted. quote, “simple and quick.” And we went the And the principle debate at the time was about other way, which was the contract pass model. I whether or not we should have an independent won’t go through every example, but even PJM system operator that did all these things, or which is the icon often cited around the world, in whether we should separate out something called its first implementation didn’t work and had to the power exchange. abandon it before they went to, as a last resort, the one market design that actually worked. And I wrote at the time about the power exchange and the subtitle of the paper at the time was about So, we’ve had a lot of experience with the separation fallacy that you could attack, take experimentation. And the center part of that story this transmission operation and the power market is about supply and demand, efficiency and and separate them. And I said at the time, the locational crisis and all the things that are argument that the system operators should associated with it that you are all familiar with. provide transmission services without any And I put these pictures up just here to remind involvement in operating the dispatch and spot you all and also to refer to the discussion that took market is a seriously flawed idea. And included place around the California Blue Book in 1994. in that paper these three questions, and some of
39 this earlier discussion, which we’ve all seen remember it. It was then written by Steve Stoft, before. I’ll let you read them. You have them in back in 1997 and the title of the power paper was, the handout, but the basic message is I designed “What Should Power Marketers Want.” When I these three questions so that the obvious answer first started to read it, I thought it was tongue in to each question was yes. cheek, he was kidding. But he wasn’t kidding. He was very serious and basically said if you look And so, should the system operator be allowed to at this from a narrow economic perspective of offer an economic dispatch for some plants? And power marketers, what would you want? And the critical words were some plants. It didn’t then I summarized what he said what they want. have to be for everybody. Should the operator And basically what he said they should want is apply marginal cost prices? Well, the answer is what they got. if they didn’t, then there was going to be something fundamentally inconsistent about the Because this, under the memorandum of prices and what they were doing, and that was understanding, was a market design through the going to create problems. So, they should be eyes of power marketers who were trying to find using those. And then, finally, should everybody something that they could benefit from and be allowed to participate and if you said yes, everybody else could not. It’s a very good paper people could voluntarily, they wouldn’t be and I think he was right on. Then subsequently I required, they’d only be allowed to participate. wrote about the market design and said, what’s wrong with least cost? And so there’s a series of I think the natural answer to these three questions other articles that are out there at the same time, is yes. And if you say yes in answer to all three but basically one of the things that happens when of these questions then the conversation is over you separate the independent system operator because there’s only one way to do it. And we from the power exchange, is you have to make know what that is. And so, what happened in sure that the system operator doesn’t offer California is that the parties got together, they economic dispatch and doesn’t seek the least cost produced a California memorandum of solution. Because if the system operator does understanding in 1995, in which they ignored the offer economic dispatch and seek the least cost principles laid out by the California Public solution then it will undermine the separate Utilities Commission. And then created the power exchange because everybody can use that separation of the power exchange and the system as the spot market and that becomes the real spot operator California ISO. And that was in a market. document that was filed. You can see all the different parties, including Speaker 4 So, they had rules that were put in for the ISO, [LAUGHTER], and then one of the responses and which said don’t clear the market. That’s comment to it, to get to the point, the quote below absolutely important. So you have to leave it said, from the filing from these parties, it said I valuable trades on the floor that you’re not going can also be read to suggest that the ISO should to take advantage of because if you don’t do that become the pool by taking schedules and so forth then our whole separation of these two things will and so on. So, the answer’s yeah, that’s exactly collapse. And when I’ve discussed this particular what I would say. And then they said, that’s with people in other countries and they go, you exactly what we don’t want to do. And we mean you had a rule the system operator had to worked very, very hard to make sure that that use in inefficient solution? And I said, “Yup.” didn’t actually happen. And so, this was walking That was our rule. And we had to do that. into this problem with our eyes open. The problems that evolved over this timeframe, There’s a wonderful paper that I recommended. as I said were going on in parallel in other places, If you go back, if you haven’t read it or don’t and PJM in particular got in trouble in 1997, and
40 then reformed their model in 1998 and went to the this big gigantic stakeholder process was going full blown locational pricing story. The picture and they discovered that congestion management that you saw before that was shown this morning. was just the symptom of the problem and there And I put this in just as a reminder that it is was a fundamental design problem of the whole possible to learn from your own mistakes. So, system. But they already had their webpage and PJM made a mistake. The tried it out. They fixed the keywords, the letters for the webpage were the market design in 1998. They went on and CMR. So, they reclassified the project as moved forward with those kind of things. And Comprehensive Market Redesign. So, the folks at FERC came up with Order 2000. [LAUGHTER] you can’t make these things up.
About that time, there was a lot of discussion And that was going full-blown early on in 2000. going on, but what we also learned from the And then we had the California meltdown in 2000 California experience is that you cannot learn which was a combination of bad policy, bad luck from the mistakes of others. You have to make and bad news. You’re going to hear about this, them yourself. [LAUGHTER] And so, what was the bankruptcies and so on. But basically my going on while this PJM process was going on in view of the California energy crisis is that the the market design, which was better than most important parts of the California energy California’s, had failed, and then they reformed crisis all happened before 2000. And most it. California was persisting in going on a new important, lessons learned along that way were direction that caused all of these problems. I about these issues about the market design. The talked about the Blue Book and then we had high prices and all that was obviously a terrible pieces of legislation and then they started to problem. implement in 1998. And then it started the sequence of amendments. I’ve listed several of But we don’t want to forget that it wasn’t that them here. 18, 19, 23 and 24. And all of these everything was working fine and then suddenly tariff amendments were things that were coming something went wrong. It was quite the opposite. back because the model wasn’t working. So, after the crisis was over the Cal ISO started up this process of market redesign again and we This disconnect between the ISO and the PX was finally had a quote that I extracted from here creating all kinds of arbitrage opportunities that which basically said the separation fallacy was a people could exploit. And they were trying to fix problem, that having zonal pricing as opposed to it and patch it and fix it. And finally, and the date locational pricing was a problem. We had to go here is very important. Amendment 24, the to do something which is actually more like what proposal for amendment came at the end of 1999. they’re doing now which is farther along. And So, this is before 2000. And the response a week there’s several issues that came up over this later that came out from the Federal Energy period of time. Market power that we’re going to Regulatory Commission was, the problem facing hear more about. Market manipulation, by which California ISO is that the existing congesting I mean if you have two different entities which management approach is fundamentally we’re talking about the same thing, the same flawed—that’s my emphasis added—and needs commodity, but using different prices like the PX to be overhauled or replaced. So, that was where and the ISO, then this creates arbitrage the quote came from in the title of this talk. And opportunities which you don’t have to have California, to its credit, when it got this order market power, it can just be smart and then you started a process which was called, Congestion can take advantage of it and exploit that. And we Management Reform, CMR. saw a lot of that taken out. And then we had patchwork regulations trying to respond and we’ll And after a little while, and I was a participant in hear more about. that process, along with many others in this room,
41
But I do want to say that I think the market manipulating prices. This of course is not the manipulation problems and the regulation conventional wisdom, but it is certainly problems were quite serious. Market power something I’d be happy to talk about later. problem I think is more controversial. And I’m going to just summarize by citing a study that was Moderator: Also truth. done by the Federal Energy Regulatory Commission. This will take longer to go into all Speaker 1: So, what’s the big lesson? The big the details, but the essence of it is that it’s really lesson is: do what we’re doing in the wholesale hard to identify the exercise of market power, market design, which has now taken over all of without having a lot of information that’s in the the organized markets in the United States and hands of very few people, like the system importantly, as everyone knows, it’s growing operator. And there were lots of studies done rapidly and organically out West because of the which were all indirect inferences. Western Energy Imbalanced Market which is also based on putting the economic dispatch locational But there were importantly some direct attempts pricings and all the other things in the market to do this by looking at individual plants, and the design that actually works. California Public Utilities Commission did a study in which they were analyzing plants during So, it was a very expensive lesson to learn in critical hours and how much did they withhold. various parts of the country, especially expensive. And the federal regulators staff came and FERC The problems, the special problems of California staff came and looked at this, and then the final and the high prices and the crisis were really bad, paragraph tells you the basic message. In the but they worked separate from, and we shouldn’t narrow context of the staff’s review of the report, forget about the implications for, market design. staff concludes that the CPUC significantly Thank you. overstated the degree to which generators held Speaker 2. power out of the market in those days when firm Right. There we go. For those of you who don’t service was interrupted, and so on. And then, of know me, I was a Commissioner at FERC from course, this was politically incorrect, so they had 1993 until 2003. Over 10-1/2 years. Calculating to add the other sentences which were, the once, I voted on 28,000 orders while I was there. Commission has not concluded the investigation I was there for the implementation of Order 636. of whether physical and economic withholding The opening of the markets in Order 888. The occurred in California in other hours and so on. promulgation of Order 2000 that encouraged the But it turns out that the only place we’ve actually formation of our RTOs. The California energy seen the evidence addressed is in these particular crisis and the ill-fated standard market design, hours. You can go through the details of this NOPR, which was issued by FERC in 2002. chart about what was going on, but these were Which is still a great idea. There’s just a lack of things where they had environmental restrictions political courage to do it now. This was a very and the ISO wouldn’t let them use it, or there painful experience for all of us at FERC. It was were transmission constraints and they wouldn’t very painful for me because I was departing from let them use the plants, or so forth. So essentially the majority in a lot of votes and didn’t have other the gap analysis and the withholding all commissioners with me. But my staff runs in, in disappeared once you started to look at the actual May of 2000 and says crisis in wholesale markets details of operation. And now, at the bottom and in California have just spiked from about $30 a this is me speaking, this was an important megawatt hour, 35 up to 280, 290. And we were moment and I say in bold here, with respect to the off to the races. Chaos ensued. Prices stayed California crisis, there are no confirmed cases of high. It was an absolute economic meltdown for withholding the exercise market power and the next 13 months.
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So, what happened? Wholesale prices soared 205 filings to establish the ISO and power across the entire West. This wasn’t simply a exchange, and the protocols for the markets. The California price problem. This was a Western entire California congressional delegation interconnectional wide problem. As Speaker 1 supported this. A letter came to all of us has pointed out, we had an extremely bad market Commissioners, Speaker 4 has it. The letter. structure and market design, and I’ll talk a little There were 47 members I think at the time. more about that. There were blackouts, business disruptions in California, in the West through this Moderator: 53. 13-month period. There was some gas and electricity market manipulation. This was a big Speaker 2: 53. Thank you for that. problem. FERC in California were slow to [LAUGHTER] And it basically said FERC, don’t impose effective remedies. FERC pointed touch a hair on its head. This is a perfect plan. fingers at California and California pointed This is what we want. And we all supported fingers at FERC. markets and this is what the seventh-largest economy in the world wanted. Staff came to us, There was a lot of that going on during the crisis. Dick O’Neill and some others, and said, “I don’t It was an absolute fiasco and almost completely know whether this is going to work or not.” shut down the movement to electricity markets in SDG&E filed a proposal at FERC to merge the the United States. Valuable lessons were learned. ISO and power exchange year’s locational AB189 passed unanimously by the California marginal pricing. Withdrew the proposal under General Assembly. I believe it was 1996, under severe California political pressure, during the the plan retail rates were cut 10 percent and middle of the hearing that we were having. The frozen until stranded costs were recovered by the President of SDG&E was Tom Page. Went out investor owned utilities. It created the separate for a break or for lunch, came back and said, “I’m power exchange in ISO. Power exchange ran sorry. I withdraw our proposal.” [LAUGHTER] day-ahead and hour-ahead markets. I think there That’s basically what happened. were other markets too, but I remember those. ISO was stuck with the balanced supply and So, what did we do? In a series of votes, we demand schedules from the power exchange that approved the bad market design, bad market were handed to the ISO. structure. In my 28,000 votes, this is the one or two that I really regret making. I was supportive As Speaker 1 points out there was no least-cost of markets, but I think we all knew better to tell dispatch. There were three big congestion zones you the truth about market structure and design. that were used. There were out-of-market I don’t speak for anybody else. I speak for me. I bilateral purchases at the last minute to avoid wish I hadn’t caved to California pressure. shortages. This is important. The ISOs were acquired to use the spot market for all of their Spring and summer of 2000, and the next few supply. They still had about 17,000 megawatts of slides I’m going to show you a series of FERC generational left, QF and hydro. I think a nuclear ineffectual orders that may have actually added unit. So, they had to sell all that into the spot fuel to the flames. Didn’t do much over the next markets and buy all their supply out of the spot 13 months. It was a desperate attempt to stop a markets. There was some hedging around the crisis that was unfolding in the middle of a bad markets, but not very much. It was strongly market structure, bad market design. Chaos with discouraged believe it or not. California shouting at us constantly, saying “You federalized the market, FERC, you’ve got to fix So, they couldn’t implement any of this without it.” And we shouted to California, “This is what coming to FERC of course. They made 203 you wanted. You fix it.” Irresponsible on both filings for the transfer of control of various assets. sides, if you want to know the truth.
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Prices were low through April of 2000, often Let’s think about them. December, 2000 order: around 30 to $40 a megawatt hour. We all said, set pay a bit above $150 breakpoint. We said, “Man, this is wonderful.” Dramatic price spikes “Look, we want independent boards for the PX in May. Up 500 percent, 1000 percent, spiking and ISO.” So, we took control of the ISO and significantly higher. Frequent system Power Exchange boards. DC Circuit later told us, emergencies, financial distress. If you’re paying “You can’t do that, FERC. This is a public $250, $280 a megawatt hour at wholesale and utility.” We recommended a $74 price for long you’re reselling at about, I think it was about $60, term contracts, imposed a penalty charge for the Moderator, at retail. IOUs under scheduling of load, and refused to impose a West-wide price cap which actually we Moderator: 60, 65. should have done. Early 2000. Multiple FERC orders allowing prices in the 300 to 400 megawatt Speaker 2: You know that trap costs which were hour range. supposed to be unconstitutional, built up quite quickly. The Supreme Court says you got to flow So, no surprise the wholesale prices continued to through wholesale costs in retail rates. Not in soar in early 2001. Utilities weren’t California. That did not happen for about 11 creditworthy. They were defaults. They weren’t months. I’m not blaming California for paying the independent power supplier. Some everything, but— suppliers withdrew supply from the market. Hard to blame them for doing that. There were liability Moderator: You can. issues. Rolling blackouts. DOE stepped in and required public utilities to sell. It may have been Speaker 2: I know you think I can, but I want to broader than that. It may have been all utilities to think FERC could have done better too. So, sell. But no, I think it was just the public utilities. SDG&E files a complaint and says help. This is a disaster. They want $250 price cap on the PX Moderator: I think it was everybody. and ISO real time markets, not a severe price cap. They basically said, “Help.” This is the way Speaker 2: It was everybody? OK. It was prices spiked. You can see it going up in April everybody. The California Department of Water and continuing to rise. This is, you can see it Resources had to step in because there was no bumping along in 1998 and 1999. solvent counterparty that was creditworthy. So, they bought power long-term. Some of it up to Well, I can tell you at FERC, we didn’t know 20 years and the average price was $245 a what the hell was happening, but we knew it megawatt hour, for that power. In March, CPUC wasn’t what we intended. I’ll tell you that. FERC finally authorized a retail rate hike. PG&E order in August, 2000, nope, we’re not going to declared bankruptcy in April of 2001. I believe it cap prices. We don’t have enough evidence. was the largest utility in the country at the time. We’re going to open a 206 investigation. I Two new commissioners came onboard in April. dissented. I said, “No. This is an absolute Pat Wood and Nora Brownell. And we put our disaster. We got to do something. Put a cap in heads together and said, “Hey, enough is enough place, we’ll figure it out.” Wholesale prices here. We’ve got to do something more forceful.” continued to soar. Buy high, sell low. The Order in April, mitigated prices, mitigated mids utilities were becoming quickly insolvent. CPUC down to the marginal cost of each unit. When was not willing to raise retail rates. They were reserves were 7.5% or less, which was virtually still frozen. And a lot of finger pointing and all the time. Established a West-wide blame. November, 2000 order says there’s a investigation saying, “This is a West-wide whole bunch of remedies we would consider. problem. The market is the West. And we’re going to look at it West-wide.”
44
That had a calming influence. Forceful Order in gas. Market flaws. Separation of PX and ISO. June, after 13 months. West-wide price cap on all FERC knew this was bad. Poor congestion bid-based and all bilateral markets during all management. No LMP. Market boundaries were hours. Which we should have done months too small. The market should have been the earlier. Must offer requirements, West-wide. entire Western interconnection. Period. It’s Dramatic cooling off of the market. Precipitous about 60% of the power got sent to California. drop in wholesale prices. The crisis subsided. This was a Western-interconnection-wide That’s the way it looked. This is a California problem that needed the Western- Energy Commission data. Causes of crisis. This interconnection-wide solution. And frankly, a was a very hot summer. It was a low hydro year. Western-interconnection-wide organized market. There wasn’t a lot of snowpack. California over- Vague prohibitions on gaming and anomalous relied on about 25% of its power source from the behavior in the tariff. FERC had weak penalty Pacific Northwest hydro. There wasn’t a lot of it. authority at the time. I think it was about $5,000 A new generation hadn’t kept pace with the sharp a day for, if somebody was caught manipulating demand increases. It was hard to build new the market. Now, it’s of course a million. Retail generation in California. I believe there was a big electricity rate freeze. Buy high, sell low is a nuke offline during the crisis. Is that right? At disaster. Sequential closing of the wholesale one point. markets incented delay in offering supply to fetch the highest price in the market. An over-reliance Moderator: Briefly. on the spot markets. There were restrictions on long-term contracting imposed by California, Speaker 2: Maybe not during the— which made it very, very difficult to hedge around the spot markets. Moderator: In January 2001, I was called and told Diablo Canyon was on because there was Changes after the crisis. The AMR to you, a kelp in it. Killer kelp. merger of the ISO and PX functions. Bid-based, security-constrained economic dispatch with Speaker 2: OK, and maybe I have that wrong. LMP was imposed. More sophisticated tariff and Unusually hot summer. Anyway, there was a market behavior rules. Congress gave FERC a significant supply/demand imbalance that fell on million dollars a day in penalty authority for a very poorly designed market. Serious market violation. The same authority that the SEC has in structure and design flaws. Natural gas prices 2005. Consequences. Power cost 7.5 billion for soared. Sorry about that. Natural gas fires units California in 1999, 30 billion in the year 2,000. that were setting the market, clearing price. It Severe economic disruptions. Gray Davis was was a single clearing price model. Everybody got recalled. Electricity competition unfairly the market clearing price. So, high natural gas discredited. prices. Of course, increased prices in the wholesale market. There was some bad behavior. The front page news around the world was FERC and California policy-makers were in electricity markets are disastrous. Stay away. stalemate. Slow to order meaningful solutions. Basically. We still feel the impact of that. That’s Finger pointing. I’ve emphasized that. I think not true. A bad market will yield a bad result. that was a horrible problem. That’s the truth. Pat Wood, Nora Brownell and I put our heads together and said never again. We Here is the significant price separation in gas know what to do. We’re going to PJM the whole prices. The lower line is Henry Hub. And Henry country. And we issued the proposed standard Hub prices increased too, but this is California’s market design NOPR. Those who opposed said spot gas prices, Southern California during the it was a Soviet planning model, a federal power crisis. These generators were relying on natural
45 grab. We got our heads handed to us. It was still Speaker 2: I told Pat Wood I’m not telling a great idea. It’s a great idea now. anybody else.
Moderator: Wasn’t it the Russians’? Moderator: We went a couple of rounds without clarifying questions. We’ll have one now. How Speaker 2: [LAUGHTER] Yes, it’s the about it? Russians’. Right. [OVERLAPPING VOICES] Pardon me? Question: Speaker 1, do you or any of the panel remember what the exact reserves were on the Moderator: It was the Ukrainians. system? Either what they were planned for, or what they actually were when all of this Speaker 2: Oh, it was the Ukrainians. Anyway, happened? it was a good idea then. It’s a good idea now. There’s no political will to do it. All right. The Speaker 1: I don’t. cleanup lasted for years. The Moderator and I were just talking about that. Speaker 2: I do. 7%.
I just read a 9th Circuit Court of Appeals decision Moderator: Unless it was zero. in 2016, on some of the behavior in California. Lessons learned. Bad structure, bad design leads Speaker 2: We didn’t have planning measures to disastrous outcome. Electricity and gas back then. We developed that after the fact. So, markets are joined at the hip. We know this. But it was the basic NERC standards which I believe this was vividly displayed in California. was 7%. Contracting around the spot markets is absolutely needed. Retail rates have to reflect wholesale Speaker 1: OK. Well, those are just operating prices. We need demand response for a well- reserves and I think your question probably was structured wholesale market. more of resourcing adequacy. And I’ve got a little bit different view than, at least nuance than And this is important. FERC should not blindly I think I’ve heard so far on that. defer to state decisions. FERC has a job to do and should do it, both when they know what’s right Moderator: Have at it. You’re up. and take responsibility for it. And actually Question: I’m up? OK. Hold on. Are we OK? market boundaries are intrastate. And regional, Speaker 1 or anyone on the panel, could you just not state by state. FERC has to insist on good clarify the payers bid order that you all issued? market structure. Proactively monitor. Have What was the impact of that going forward, the clear rules about market behavior. Investigate thinking behind that and what did that result in? and penalize bad behavior. Act quickly and Because I had forgotten that specific interim forcefully to shut down a chaotic market. And order. finger pointing between FERC and the states doesn’t work. Thank you. Pardon me? Speaker 2: Yeah, it was payers bid.
Moderator: You said you regretted two votes on Questioner: Maybe about 150 or something like two orders. [UNINTELLIGIBLE] for your that? markets, but I’d like to know what others. Speaker 2: About 150. It was intended to look Speaker 2: Oh, that’s a secret. [LAUGHTER] for bids below 150 or below. This set the market clearing price. Pay a bid above 150 won’t set the Moderator: Can you waive executive privilege? market clearing price. The problem was natural
46 gas prices were so high at that point, the right causes. And preconditions were responsible for point was about $150 bucks. And so that didn’t it, but I tend to put a lot of weight in this work so well. But it was intended to calm the comparative negligence investigation on who had market. It didn’t work at all. the last best chance to avoid the accident. And as far as I’m concerned it was the California Moderator: All right, let’s keep going. government that did. And that they failed miserably. Speaker 3. OK, so let me tell you first of all what my vantage It wasn’t that there wasn’t a lot of other point was in the company. I worked for Southern contributors and I have a few things to say about California Edison at the time. And I was Director FERC as well. As well as everybody, as well as of Regulatory Policies. So, I was not at the very other market actors. But just to let you know top of the company, by any means. If there were where I’m coming from and I’ll try to expand on a half dozen people that got together to strategize that. It’s the last best chance to avoid the I probably wouldn’t be in the room, but if there catastrophe. were a dozen people that got together to strategize, I almost surely would be in that room. I will plug myself and say you’ve all got copies of this article that I published in 2002, in And the management at that point had a pretty Electricity Journal and I was impressed when I well socialized process of managing. And so, reread the article on the airplane coming out here. everybody pretty much knew what the strategies [LAUGHTER] I think it’s one of the better short were and what was going on. So, I feel like I’m things written on the crisis. I mean there’s books pretty well informed. I don’t have any continuing written about the crisis. So, there’s plenty of stake in Edison. I’m acculturated. I’m sure things that you can read. So, I’m going to maybe Speaker 4 will agree with this. I’m 20 years of go through two slides, but I don’t want to go acculturation into the utility industry and so, I’m through all my slides because we’ve already going to be inclined to have kneejerk reactions to talked about a lot here. Let me just kind of get to, defend the decisions made by the company up to yeah got it. I think there’s general agreement a point. I could tell you probably one story out of about the kinetics of the accident. This happened school and I’ll do it a little bit. There’s nothing and this happened, and this happened and oops. terribly surprising about it. All sorts of bad things happened.
So, I’d been told I have about 12 to 15 minutes to So, we start off with market fundamentals, a talk and I don’t want to repeat what’s already tightening of the market. We probably could been said and I agree with 90 or 95 percent of argue about exactly how tight it was. I think it what’s been said. So, I want to focus on causes tends to be a little bit over emphasized, but it’s and I want to focus on some of the subtleties that certainly part of my story that the reserve margins may not be so apparent and maybe where I dissent certainly got thin by all means. And they a little bit from statements that have been made confronted a retail structure that had mandatory before, I’ll throw those in as well. divestiture of a great amount of power plants. And mandatory buy and sell from the spot market So, when you think about causality, I mean by the utilities. This was one of the really big causality is a flaky, squirrelly notion to get your mistakes that was made in terms of market hands around, especially when you’ve gotten structure. multiple factors contributing to things. It’s like having a traffic accident. A complex traffic So, utilities were sitting there with these huge accident and I’ll argue about well, what caused it? short positions that had to be filled on a day-ahead Well, there may have been four or five different basis, basically, and in real time. And they didn’t
47 have the generation to satisfy their needs. And things. And one thing is the issue which I think then you combine that, then just go on from there is a little bit of a phony issue. Not that it’s a and say the fact that as markets tightened and you nonexistent issue by any means. I just think it’s had such a great need for purchasing in the short overemphasized for political reasons by some term, I think you had suppliers who got market people who want to solve a notion. That it was power. all caused by California NIMBYism.
And there were lots of other things that are Now I’m not going to tell you that there isn’t happening here and there’s lots of debates about NIMBYism in California. Come on. But there just what kind of contribution for manipulation, was generation shortage throughout the West in what kind of contribution to market rules, et terms of building during the decade before the cetera, but I believe based on some modeling that disaster. There was investment uncertainty I did and I actually got published in another throughout California starting in 1993 because Electricity Journal around this time. We did nobody knew what the structure of the new some simple oligopolistic stuff that just, when market was going to be. It was announced that you have this few players and you’ve got such there would be a new structure, but it wasn’t put large demands that they need to satisfy, and in place. And also, there was this tremendous you’ve got fairly tight margins then it’s very easy reliance, I think over-reliance, on what people to tacitly collude and through Cournot oligopoly perceived to be working in the U.K. tacit collusions, simply charge much higher prices. And I think these markets are subject to a And that led to the perception that an energy natural amount of market powers, especially market, energy-only market is perfectly fine. when the margins get tight. Energy prices will go high, people will get the signal to build more capacity, they’ll build more And the lesson is protect yourself from that and capacity and the high market prices will subside protect yourself through long-term hedging. So, and be quelled. And I think that what we’ve we had these incredibly high wholesale prices. experienced, if anything it continues to be an And then we had the retail rate freeze that didn’t elusive problem today, is the whole resource let utilities flow that through and put the entire adequacy issue and how we deal with resource burden on the utility balance sheet and solvency adequacy. and cause bankruptcies, et cetera, and all sorts of chaos. And of course, the real problem ultimately So, there’s still those things festering around. in terms of the last, best chance to avoid this Natural gas prices were brought up. I cannot catastrophe was with California government, not over-emphasize how that really, really asserting leadership, getting people together and exacerbated, complicated the problem. reaching a settlement. Everybody believed in the summer of 2000, well, this is going to be a summer 2000 problem. Then So, in short, you had these short-sided market it’s going to subside because the loads are going structuring rules. You had adverse market to come down, and then it will be a problem in conditions. You had inefficient market rules and the summer of 2001. And so, we’ll have this all combined with manipulation and market decent interval in which to try to solve things. power. And you also had just simply dithering by the various regulators and ultimately everything That just didn’t end up being the case for a blew up. Blew up on January 17th, when utilities number of reasons, but I think in no large part, or went insolvent. no small part, due to the run up in the gas prices. That happened in November and December. As I said I don’t want to repeat everything that’s They just made solving the problem just much been said, but I do want to comment on a few more critical, in terms of doing it quickly, and
48 much more difficult to deal with. You had the Basically, I tried to sell them on vesting contracts retailers returning to their customers to the that the utilities would have from the generation utilities, driving up the utilities’ net short that they were divesting for at least five, six, position. You had Enron turning back its seven years to kind of smooth out the process. If customers to the utilities, basically saying, “I’d that had been done this wouldn’t have happened. rather take this power and sell it in the wholesale But that was absolutely rejected. I was thrown market than sell it under the contract that I got out of the room. I mean it was incredible. There with this lousy customer. Sue me in court.” And was just nobody. There was no appetite for that. they did get sued in court for doing that. Let me say a few things about FERC. I really You did ultimately have lots of reliability don’t blame much on FERC, especially of terms problems that we all remember, but which we of comparative negligence in this accident. And might forget. Those things happened for the most certainly not compared to California. FERC had part after insolvency was declared by the utilities. put market-based rates in place in what, 1987, And what was happening there was that ’88, ’89 under the old HESI regime. But there generators were definitely withholding at that was never any standard that I recall, for exactly point because they knew that they did not want what was a reasonable rate. their reward. They were expecting cash for their power. They didn’t want a seat at the bankruptcy And so, FERC was definitely recognized because table in order to recover the cost of power that politically it couldn’t recognize, couldn’t they had sold to utilities. possibly not recognize that the high prices in the summer of 2000 were, yes, they were unjust and So, we had 32 days straight of Stage 3 unreasonable. But the only thing they had to emergencies. Rolling blackouts, not generally, apply was the pornography standard and it was but all the interruptible customers didn’t think absolutely clear. Those are unjust and they’d signed up for so many interruptions. And unreasonable, but what the dividing line should so that was a big problem in January and be between just and reasonable and not just and February. But those were January, February reasonable was not something that they had ever problems. There were a few reliability problems put a sharp focus on. Because they never had to. in the summer of 2000. But when you recall what happened there’s a tendency I think to take all So, I don’t blame them. I don’t blame them from those rolling blackouts that we had in January and an institutional standpoint because I think these February of 2001, and think, “Hey, a lot of those are the kind of fine point issues that need to be things happened in 2000.” That’s not the case. driven by specific cases for the same reason that They didn’t. the Supreme Court does not hear arguments about hypothetical law suits. Bring me a real lawsuit There was also the fact, and this is a bit of an and I’ll tell you exactly what the dividing lines omission. I personally tried to sell the WEPEX are. And I think FERC was faced with that same process, which was the process in 1996 and ’97 thing. So ultimately, they were faced and we will that was trying to put together the structure of the discuss here and disagree as to what are the market. I went in and tried to sell them. I contributions of market power. Meaning either remember going into the meeting chaired by economic or non-economic, or physical David Freeman in a hotel out in the airport. They withholding. had all the WEPEX people, Mike Florio, et cetera, et cetera, wearing buttons that said Divest Market manipulation of the type practiced by Now. Enron, but not just that because they were actually in many cases violating the tariff rules, which was clearly illegal and they got punished
49 for. But they were also blamed for gaming the didn’t do something. But what did Davis do? He rules. Well, what the hell does that mean? kept his own counsel. He said, “I’m not going to Gaming the rules. I mean, I set rules in place. talk to anybody because you guys are all contaminated. I’m not going to talk to the When the IRS puts rules in place and then we utilities, I’m not going to talk to generators. I’m have to figure out well, what’s tax avoidance going to go sit in my office and figure out what versus legal tax avoidance, versus tax fraud? the, how to solve the problem.” I’m not sure what Well, you can’t put rules in place and then expect he came up with, but he wasn’t talking to that people will please play nice. Play nice with anybody. He should have been talking to these rules. I mean these guys are all trying to everybody. make money. And so, it’s difficult to put a fine point on these, on these gaming issues. And I Then you had Commissioner Lynch at the PUC, think the bigger thing in my mind is that the who I think was outwardly hostile towards the Federal Power Act just says, prices have to be just utilities. Naturally, we're all paranoid. I mean and reasonable. It doesn’t say, and only prices being a utility employee that’s always the case. that mimic a perfectly competitive market are just But I really do believe that she was getting bad and reasonable. It doesn’t say anything like that. advice and bad visceral reaction that, “So what if the utilities go bankrupt? We’re going to, Economists might wish that it said something like somebody’s got to pay for this thing and utilities that, but it just is a bunch of words and it’s not shareholders ought to pay for it. We’ll just take exactly clear what that dividing line is. And I their equity. We’ll pay for the power with their think that when, what really is difficult equity and they’ll go and solve and no problem. philosophically, and it will come up many, many We’ll just change all the names of the stock times again, in terms of lessons learned, is what’s certificates and that will take a night. And then the dividing line between X, improper exercise we’ll go along our merry way without any and market power, and just scarcity pricing? bumps.” Economic grants. All I’m earning is economic grants. I heard plenty of this is just economic I think there was a real lack of understanding as grants that we’re earning. We’re not behaving to what the real impact of bankruptcy is as people illegally here. We’re not withholding. tried to avoid getting stuck at the bankruptcy table for months and months and months, trying to get How do you discern and put in place mechanisms their money. And that’s what played out. And that will discern those nuances? OK, so let me then you’ve got the issue, and I think this is get on and talk about why did California dither? significant. When I think back at it and I also talk Well, first of all California dithered because the about it in my Electricity Journal paper. There governor was a career ditherer. [LAUGHTER] was the thought that this was all going to subside And I take that from comments that I’ve heard after the summer of 2000 and we’d have this nice from knowledgeable political people. He built window of opportunity. his career on temporizing problems. I’ve got a lot of sympathy for, I think the first thing you ought Now, in that window of opportunity the Gray to do is not respond to emails too quickly. Davis plan was, “First of all, FERC is going to [LAUGHTER] And you temporize problems, but solve the problem, in some sense. And drive the there’s a limit to that. I mean clearly this was a prices down. And then we, California, will go out huge problem. and enter into long term contracts at reasonable prices, but we’re not going to go out there and They were warned as early as September by contract with the generators, while these prices Standard and Poor’s publicly that they were are out of control and the only prices on the table headed for insolvency by early 2001, if they are high prices. So, we’re just going to sit here
50 and dither and point our finger at the F-E-R-C, consumer advocates, totally changed that until they do something.” And I think that’s one accounting, and basically provided for the, of the dynamics that really got into us dithering essentially accrued additional stranded cost. And and pointing fingers, et cetera, et cetera. the utilities cried foul.
Then you had that window close. It wasn’t just a I wasn’t close enough to this whole process to December of 2000 problem. It was a problem have an independent objective opinion as to what that festered and festered rather quickly. And the utilities really thought, but I do know what then, finally, this is my last point. I think that they said. And what they said was really another reason why the California parties could consistent with ultimately the filed rate doctrine. not get themselves together in the settlement was That is when the price goes above you can’t tell there was just a lot of bad blood and poisonous them they can’t recover that. And so, the federal atmosphere. And everybody is kind of pointing courts ultimately said, “No, you can’t let that fingers: “This is not my problem. This is your whole, high wholesale price establish more problem.” stranded costs. That just isn’t the way, that’s not something we’re going to approve.” And not to use a sexist term, but their allusion here, that this was a game of Old Maid. Who was And that’s the way it ultimately turned out, but in going to get stuck with the Old Maid card at the the meantime we had to go through all this hell of end of the day? Not me. Not my fault. You’re insolvency, bankruptcy, getting the California the one that deserves to have it. And it comes government in, getting all sorts of money from down, a great part of it comes down to the the California government, et cetera. We just interpretation of what was the meaning of the kind of transferred the problem from the utilities retail rate freeze? The retail rate freeze was put to the California government. There’s a lot of in place at about $65 a megawatt hour. And it poetic justice in that at the time. I remember that contained headroom in which the utilities undoubtedly wasn’t Speaker 4’s perspective, but assuming normal operation of the wholesale from a utility employee advantage, that market would probably be able to recover their perspective is OK. You guys screwed up by not stranded costs within five years. But we’ll put solving this. Now you got it. And they just them at some risk and if the wholesale prices go proceeded to get all sorts of stranded costs up and squeeze the headroom then that’s the risk essentially placed upon them. So, that’s it. they’re taking. And the utilities signed up for that That’s all I’m going to say. risk. Moderator: So, you’ll have some clarifying Well, what the utilities didn’t think they were comments I’m sure from great people, including signing up for was the risk of having stranded me. [LAUGHTER] But let’s listen to Speaker 4 costs added, too, if the wholesale price went so this time first. high that it actually exceeded the rate freeze and they had to eat it. In other words, their Speaker 4. interpretation was OK, then that access should go OK. I’m going to get set up here. Well, I wasn’t into a balancing account that will eventually will there and I paid my own way so I have no idea be a regulatory asset, a firm regulatory asset, why HEPG invited me to this, but it’s been very we’ll be able to recover that eventually. interesting to find out what happened in California 20 years ago. And originally, the accounting for this was set-up and approved by the PUC that had that view. I’m with the Independent Energy Producers That the retail rate freeze was kind of a one-way Association. I represent the wholesale electric deal. But then the PUC later, from advocacy from generators renewables as well as natural gas and
51 now storage. And I was front and center in all We talked this morning about the future world this back in the days that when we first did all which is going to be 100% green. I don't know this, by the way, there were QFs. There were no how you do that with variations in weather and AWG. AWGs had just begun to get into the everything else. We’re working very hard on this market and whatever else. issue in California. But I see danger in not learning from the past. And this gives us an So, I thought it would be useful to kind of tell you opportunity, I think as all three of my colleagues how I spent my summer vacation in 2000. In the have pointed out here, if you have a bad market summer of 2000, ISO California during this structure, expect bad results. And if you have bad period of time had a 26-member stakeholder results, be prepared to act quickly. board. I had been assigned the task of being the chair of that board and, as well, I was talking to A lot of this you heard already. I’m not going into senior utility people in Florida once and they market design flaws. My colleagues have done a were going, “Well, why in the world did they good job there. The hydro conditions, gas appoint you, the leader of the QFs as the head? disruptions always get forgotten in this discussion How did the IOU let that happen?” And I said, and it’s very important to remember. And the “Well, because each of them trust me more than main thing I want to point to is the lag in prompt they trust each other,” which the entire group regulatory and political action. So, expectations laughed except, until their CEO kind of went, that California restructured. So, why in the world “Ahem,” and they all started staring straight do we do this in the first place? Peace is hell. In ahead. But I ended up being the chair from, 1990, early ’90s, the Cold War was over. It’s basically, the inception of the ISO through hard to believe that now. And recession impacted January of 2001. And it was a really exciting time the California economy. California economy was and for a while it actually did work. heavily based upon aerospace and defense. There is three different bases that closed in my town of Everybody kind of forgets that, but it did work. I Sacramento. was involved in getting a Harvard education seminar when Speaker 1 and a number of others Governor Wilson, who had just been elected, would come out to California in the mid-’90s to ordered his entities to figure out how to revitalize talk about what the perfect market structure was the economy. The PUC in 1993, investigates and there was significant discussions about all of alternatives, potential alternatives. That was The this. And so, he was kind enough to point out the Yellow Book. A great read. I still have it. And fact that I did sign a thing called a Memorandum then Speaker 1 talked a little bit about the PUC of Understanding in which I’ll get to in a minute. wrote another book called The Blue Book, in which you decided that it was going to go forward But the reason I think this is all relevant has with direct access model. And that there was a nothing to do with “Gee, this was an interesting pool related to that. time and Steve Peace had a funny movie.” But it kind of makes sure this doesn’t happen again, At that time Commissioner Fesler who was in because none of this was done with malintent. love with all things British was infatuated about People didn’t deliberately screw things up the liberalization in the U.K. And that was the because they thought it would be an interesting focus. The commercial industrial customers experiment. This whole thing was driven by wanted direct access and a date certain. That was some very important expectations about how the the key thing they wanted. There was a whole lot world ought to work. And obviously things went of cheap hydro in the Northwest at that point in awry and the real story here is what do you do time. And in order to keep industry going in when stuff starts falling apart? California they wanted access to it. They didn’t want to pool. They didn’t want any help. They
52 just wanted to go get it. Utilities wanted the provides customer choice. This will ensure that ability to cover stranded costs. all electricity companies, both large and small benefit from rate reductions resulting from This is not anything surprising. And there was a competition. It will prove the reliability service strong preference for the California restructuring. advances the state’s environmental concerns, It was going to market, not regulatory decisions ensures the financial soundness.” I already lost for future investments. Now, in California at this myself. “The system of the utilities and, in short, point in time, we went through a buildout of a it will provide tremendous benefits to the citizens number of nuclear power plants which followed of the State as well as those doing business in the traditional pattern of coming in late and over California. We are justifiably proud that budget. And they were expensive. And we didn’t California, which represents the seventh largest want to do that, so we backfilled stuff with economy in the world, is again in the vanguard of qualified facilities. Both of these by the way are this unfolding issue. We believe that the based on a $100 a barrel oil, which obviously did decisions made in California in utility not happen. restructuring and competition are the right ones for the state, and must have the opportunity to be So, that was kind of a decision that California was fully implemented.” trying to learn from. And so, as a result of that, we’ll get to this in a minute, of why people don’t This, in case you missed the subtlety, is basically, like contracts. Market efficiency would lead to “Hands off, federal government and FERC.” So, lower prices and innovation was the expectation. that was there. So, when you hear my colleagues Now, the letter. And I brought this because in California suggest that somehow they were just everybody goes why in the world was Speaker 3 asleep at the switch, there’s more to that story asleep at the switch? than that. All right. I’m not going to go through all this other than to basically say that California Moderator: Everybody wants to know that. legislature voted unanimously supporting electric restructuring. The whole thing about sausage and Speaker 4: Yeah. And, this is a little out of order, the law, this was the world’s largest sausage. but in 1996, 1995 we did the Memorandum of Everybody got something out of this and I mean Understanding between, that you saw earlier, everybody. between Edison, two different manufacturer groups, IEP, my group was there, basically to So, there was a lot of things that were put into it. protect our QF interest. I was glad, I spent the The 10% rate reduction which I think we may still entire summer of 1995 helping solve stranded be paying for, I don’t know, was sort of a bait and costs issues which had nothing to do with me, but switch that basically say we were obediently we needed to get the job done. lowering your rates. But at any rate, that was there. Steve Peace actually gets a bad rap. Steve But at any rate, so we were very proud of the Bill Peace was the chair of the Senate Energy 1890 and so, this letter, so this was signed by the Committee. He held up all the legislation to have entire California Delegation for the purposes of a mega deal. So, Edison had a thing, something protecting the restructuring construct from the on basically their [UNINTELLIGIBLE] plant Federal intrusion, those people at FERC. and the manufacturers who were driving a lot of And I’m just going to read a couple quick things this wanted direct access and he held up here: “This historic legislation AB 1890 was a everything except for these long hearings. result of months of careful study, thoughtful There was literally 100 hours of deliberation on consideration, intensive deliberation by a broad this in terms of formal, informal meetings. I think based coalition of stakeholders. The new law he got that job done and his problem was he never
53 let go and kept talking. This may remind you of was assured the ISO, and literally a day after I someone who is currently still talking, but at arrived we have to have a debate on price caps some point in time you leave whatever you’ve because that’s all we started talking about. So, done and move onto other things. He didn’t. you’ve already seen the issue.
And in full disclosure, my wife actually was his The other important part and there’s a big spike chief of staff at the time and was responsible for on Speaker 3’s slide that occurs. It’s not July ’98. putting words on paper when they would come It’s July 2000. There was a tragic event on the El out of these hearings. So, at any rate, we know a Paso Pipeline. A family had camped on top of little bit about this. So, the market structure as where the pipeline went through and blew up the you’ve seen, basically we had the power camp. And shut off a major supply of gas to exchange. You’ve already seen all that. There California. So, it just got worse and worse and was a date certain. worse. An internal gas leak in California was running hard. It was an old fleet. A number of The only thing I want to put here, the ISO was them ran out of air quality credits. You’ve designed basically to operate as an air traffic already had the conversation about accusations controller, as it was suggested earlier. And the and supply withholding. CPUC required the ISO used to vest, 50% of their fossil generation. Now the key on this is that they But I mean the point is that the entire West sold pretty much all of it because they were rapidly went out of control. It hit the fan May of, getting good prices for it. People forget the fact I keep saying ’98. I don’t know why. But at any that people were paying three to four times book rate, in May 2000, San Diego, it paid off through value for some of those properties and we all stranded costs which basically meant they were assumed at one point in time they were going to now exposed to the market rate, wholesale market be stranded assets. Well, they weren’t. OK. rate. They basically generated a lot of capital which my utility colleagues put in there, in affiliated Moderator: The customers. companies and off they went elsewhere to invest that money. And that all worked. Speaker 4: The customers, yes. And this had a really negative consequence because these bills But anyway, the point is that they did basically literally doubled or tripled like in a month. So, run, they’d sell off all those projects, fossil Senator Peace, who presided over 1890, also generation and there was a plan to sell off their represented San Diego and this was not a pleasant hydro as well, and there was always a question time for him. At one point, when he was yelling what to do with nuclear. So, at any rate the at one of his kids about losing his cell phone, and squeeze which we talked about earlier, basically he said, “Well, Dad, at least I didn’t screw up the you saw prices move up in the gas market, in the energy markets.” So, [LAUGHTER] his own spring of 2000. I had a colleague of mine that was kids were like [UNINTELLIGIBLE]. in the gas business and he was telling me he wasn’t sure what was going on, but it was getting So, at any rate, there was an immediate call for interesting. I guess the event occurred on May price freezes. Price gaps became a major issue 10. and the reality is that the ISO Board when I served on it, basically we had price gaps, OK. We Now I can honestly tell you I was in Sweden, so had price gaps and I think it was ’98, ’99 for I have no idea how any of this happened, but I got ancillary services. We relieved those price gaps back and all hell had broken, I didn’t do it. I was when we thought we fixed that problem, but there in Sweden and I probably should have stayed was always a default at 750. So, when you hear there. But at any rate, came home and again, I that California didn’t have price gaps, that isn’t
54 necessarily true. The question was, what should Speaker 4: It jumped back and forth. the price gaps be set at? There was sort of a default at 500. Moderator: Which was an incentive for the utilities to also move to the ISO. I’m getting real wonky here, but it’s important to understand that the debate was about the amount Speaker 4: So my point is that the obvious of money that you should be paid in the price gap, solution to this was everybody was short. OK. not the fact that there was a resistance to price And the thinking in the entire industry by the way gaps in general. And by the way, people were at that time was go short. Because look at all the offering power at basically five cents a kilowatt mistakes we made with the QF contracts and hour and the state wanted us to do 25¢ an hour. nuclear power plants and everything else. So, So, that didn’t make any sense. SDG&E requests let’s just go short. in June of 2000, anybody can help us please do. There was a lot of response to that. I know that This wasn’t completely out of whack with some for a fact and most of those deals were between general issues, but there wasn’t an opportunity to $50 to $56 for power based on what people could resolve that problem. Governor Davis basically buy gas at the time. announced, “I’m sorry, I’m falling back here,” that he could solve this problem in 15 minutes, or PG&E and Edison also sought contracts to whatever. Governor Davis was a person who stabilize price volatility. My opinion is if a wanted to make all the decisions, but couldn’t significant amount of that, you didn’t need to do make any decision. This was a character that was the whole damn thing. It would have very smart, probably the most qualified person materialized. We probably could have knocked we had as governor, but when it came down to most of the volatility out of the system. The state making decisions he couldn’t, or wouldn’t, did not like long term contracts. And the because they were politically risky. Commissioner Lynch who had absolutely no experience in the energy area, was pretty hostile At this point in time, the Democratic convention to them. Few contracts got forward. was coming to California. I think he had a high expectations of his future. Didn’t want to raise And here’s the subtlety because people would rates. Wanted to look cool and, well, the rest is say, “Well, no, the utilities could have gone history. He’s no longer governor and at any rate, forward and done all that.” In AB 1890, if the so we talked a little bit about the FERC response. utilities bought out of the power range it was per I don’t know that we need to add anything here. se reasonable, no matter what the price was. OK. So if it was capped at 25¢, as long as they don’t Basically as I said, by August, 2000, we had go above that. So, when they basically said “OK, reduced the price cap down to 250. That was we want a contract, we can get it for 5¢,”, her approved by FERC. FERC took a couple of other response to that was, “Well, yeah, but if next actions in December. Replaces the ISO price cap year’s down to 4¢, you have to eat that delta. with a breakpoint. This was very controversial. Well, the risk-averse. So, if someone, if it’s per But basically they addressed it the best they could se reasonable to buy it out of the— at the time.
Moderator: Unless I misrecall, the PX didn’t I got a call at the end of December since I have a cap did it? Just the ISO. You remember, represented QFs. Rick Glick who at the time Speaker 2? worked for the Department of Energy, for the secretary there. He said you represent all the QFs. Speaker 2: I can’t say. I think that’s right. Can you come to Washington because we’ve got to fix this? And the QFs at the time, particularly
55 renewables, since they weren’t buying gas, they was pointing out, “Well, the nickel price was in were kind of keeping the lights on a lot of places. June. The gas market’s out of control and we But they were owed a lot of money, so there was can’t substitute PG&Es balance sheet for ours.” a big concern about whether or not people would push Edison in particular into involuntary Somebody had the brilliant idea of asking the bankruptcy which didn’t happen. OK. We’ll just governor’s chief of staff, well couldn’t the state leave it at that. back these defense actions and what the idea was leaving them. Basically, let the utilities continue So, basically outgoing president orders the to buy and whatever, and the state would back secretary of Treasury, secretary of Energy and that up because obviously they were competent to FERC chair to hold talks. Governor Davis, the do that. Instead that turned into, “Well, no, let’s entire leadership of the Legislature as well as all have the Department of Water and Research do the CEOs of the IOUs and the IPPs, and QFs, it.” And the rest is history. show up in DC in the Treasury Building. And we all have these, this just turns too real for me. So, the contracts were procured. Ink dries. We’re having these negotiations with respect to Litigation ensues, full employment from the DC how to undo all this? Basically, they, IPPs, IOUs bar and everybody got to send their kids to private and QFs reached a deal, brokered by Secretary colleges. And I think there’s still a case open. So, Summers and this literally was done in a bunker at any rate, just finishing up here. underneath DOE. Moderator: And did you leave the 202C Order And just a side note. It’s 10:00 on a Saturday out on purpose? night. And I’m having pizza with the secretary of the treasury and look at him and say, “You know, Speaker 4: Well, he already raised it. there was a table full of people. This is, I never Speaker 2: He put that on the white. in my wildest dreams or nightmare thought I’d be having pizza in a bunker underneath DOE. Moderator: It’s almost like the key moment in Having pizza with the secretary of Treasury.” the whole thing. And he started laughing, “Me either.” But that’s what happened. So, we ended up with a deal and Speaker 4: Yeah. the Department of Water and Resources ends up procuring long-term contracts. That wasn’t Question: Who requires like— originally the recommendation of the person who made that, who thought that idea up. Speaker 4: Yeah. I’m trying to find this. [OVERLAPPING VOICES] Oh, OK. Yes. So, Moderator: Wasn’t that you? the, I’m sorry?
Speaker 4: Yes, it was.
Moderator: Yes, it was. Moderator: Keep going.
Speaker 4: But I wasn’t there and I didn’t— Speaker 4: Yeah, I’m just trying to blast through this, so lessons learned. Don’t hardwire Moderator: You weren’t in Sweden yet. economic expectations and no legislation. There was assumption that if you go to market it’s Speaker 4: I was not. So, the CEO of Dynegy always going to be lower cost, not higher costs. was a great guy, was having a debate with And the market was not designed to move around. Governor Davis because Governor Davis at that You didn’t expect any major initiatives to run into point wanted power for a nickel. And everyone
56 friction. Do not limit the ability to respond and Moderator: So, why don’t we take say a 10- we had a lot of that. The state-federal regulatory minute break and come back with some questions interaction was absolutely necessary. And in back and forth. [APPLAUSE] December 2000, could have gone a lot better with limited damage had that been better. Going short without adequate hedging leads to chaos with the market shifts, which is there and obviously General discussion. suppliers, in my industry I represented a lot of Moderator: All right. We’re going to go ahead people for whom competition is not only a good and get started for the final round of today’s economic idea, but it’s a religion. And it’s very festivities. If anybody has questions raise your difficult to be responsive to the other political and placard please. Since I raised mine first, even economic consequences that are floating around though we were not really starting this process in the energy market. yet, I will ask what really is a clarifying question. And then the last is hubris is dangerous. When Oh, you beat me? Too bad I control the we cast AB 1890 I for one could arrogantly microphone right now. [LAUGHTER] So, I was wander around the West telling people how just wondering, as I listened to our esteemed brilliant we were because we passed a piece of panelists talk, whether the economists up here legislation that was voted on unanimously. And have the same or maybe in a nuanced way, it wasn’t until several years later that I found out slightly different understanding of how they that was perhaps not the brightest thing to be would use the word withholding in this context. bragging about. Withholding output from generators.
So, at any rate, my major concern is that looking Respondent 1: The Moderator asked during the forward as we’re trying, in my state now we have break if we’d answer his question for definitional SB 100, where we’re going to go to 100% clean purposes, so what I mean by it in this context in energy by 2045. No one knows what the hell that withholding and exercising market power on the means. We’re trying to incorporate demand, generation side is either by physically removing distributive energy resources into our mix. No it from the marketplace, or by putting in an add one knows how that’s going to work. that’s physical withholding or economic, or putting in bids that are offers that are so high that And just recently we find out that it won’t be taken, or taken at very high prices. notwithstanding all of this that you’ve just seen and our eyes wide open, somehow we’re between And it’s therefore not producing and the key is 2500 and 5000 megawatts short of resource that then in the end, in real time the generator adequacy in the date 2021, which is two years does not produce electricity and the prices above from now. their marginal cost of producing electricity. And so, and that’s to distinguish between the situation The whole point of talking about history is to where they are producing electricity and they’re avoid making the same mistake more than three getting paid a price which is substantially above of four times. And my concern here is to their marginal cost. That’s called scarcity rent. basically use what explains I think from the And I don’t consider that to be, so the actual not standpoint of mistakes that can be made and producing in a material quantity when it would in should be avoided in the future, recognizing the fact as a narrow decision for that generator alone, fact that the issues may be completely different. would be to produce because prices above their The markets may be completely different, but we marginal costs. And the usual assumption is they need to learn from the past. have a lot of other generation which they can benefit when they have higher prices. But if
57 they’re not, if they’re not physically withholding Respondent 3: And I don’t disagree with that, but or bidding in such a way that they end up not then I go back to the legal issue and that is: Is producing then it’s not withholding it’s a scarcity scarcity pricing illegal under the Federal Power problem. Act? And that calls for I think a legal interpretation. Economists may wish these laws were all written by economists and that that would be perfectly legal, but the issue is what’s Respondent 2: Let me just say I think I basically just and reasonable. agree with that in terms of how I would define withholding in this context. And then the issue is Respondent 2: Well, FERC declared to be in a should withholding by either of those definitions case that went to the 9th Circuit. But that was just be deemed illegal, unreasonable, contrary to the recent. The 9th Circuit ruled in 2016. When I was Federal Power Act. at the commission, we were quite aware that, I think it was called the MMIP, the Market And that’s an interesting legal question. Because Monitoring and Information Protocol. Is that I believe that what these guys did for the most what the I stood for? Anyway, it was perceived part was probably engage, and I never really to be part of the tariff and it prohibited gaming studied this in detail. I should really put that and anomalous behavior. caveat in there. And we had parts of the company that have studied this much more than I. The problem was FERC had never really defined what gaming was or anomalous behavior was. But I think certainly if I was a generator I After the fact, as I recall, perhaps years later, wouldn’t absolutely withhold, I’d stick in a anomalous behavior was defined to include hockey stick bid and hope that others would too economic withholding, but that wasn’t clear and hope that we’d all get a nice fat price. And when I was at the commission. then the issue is, “OK, so what’s wrong with that?” And then we’d get into the interpretation Moderator: So, let me make a couple points and of what’s just and reasonable under the Federal I’ll start calling on people unless those points Power Act? stimulate a little brief discussion.
Respondent 1: The hockey stick bid, you put in a Just to make this point clear, whenever you talk low price for 90% of your production and a high about the California Energy Crisis, or the price for 10% of your production and you hoped Western Power Crisis, there’re allegations of you’d end up getting the high price for 100% of physical withholding. Well, the machine was your production. That’s scarcity pricing. Hockey broken, but not really. That almost always stick bid, when you put in and you put a low price involved allegations of the group that used to be for 90% of your production, a high price for 10% called the Big Five, [Donich and Myclyde, Duke, and the price turns out to be above your variable Mera (SP?)] and Southern, Williams, I’m cost, but you don’t produce the last 10%. That’s forgetting someone. And all those companies economic withholding. settled before there was a litigated resolution of what actually happened. OK. So, it’s not the hockey stick per se that matters. It’s the shape of those over curves. But there was never, at least anything that I saw, That’s what actually happens. And if you and I used to challenge the lawyers on the other produce 100% of what you could produce, you’re side to point me to something I missed and they not withholding. No matter what price you never could. There was never an allegation of charged. That’s scarcity pricing. actual physical withholding that held water. Instead, what the evidence really uniformly
58 showed is that generators are mailing huge pieces didn’t want the audience to be left with the of equipment by overnight planes to get it there conclusion that Southern California Edison was because they wanted to make $500 an hour. so risk-averse that it just accepted buying everything out of the spot market, because it was And if you were going to go down the road of per se reasonable. physical withholding in your plant, that could get you into a hell of a lot of trouble and for all you In fact, going back to late 1999 and going into the knew, that ISO would just engage in some sort of year 2000, Edison made a couple of applications out of market activity, if you really wanted to go with PUC for a lot of forward contracting. And down that road, and the price wouldn’t go up the PUC came back and allowed about this much anyway. So, there was never any persuasive forward contracting. And then a couple months showing that anybody ever did that. The CPUC later the PUC put forward a framework that said, came in with some allegations pointing to a few “OK, if utilities want to engage in forward instances, Speaker 1 was talking about this. contracting they can, but they need to submit their contracts for reasonableness review to our PUC The FERC staff looked at those instances, found staff.” This was around the time that we were all them to be a dry hole, so the physical withholding trying to get things settled and Duke was, as I I think ends up being a canard. Economic recalled, offering a good amount of power for withholding in the decision, unfortunate decision something on the order of— that Speaker 1 referenced, and you remember this because you were one of our experts. But prices Moderator: 75? and get ready for this, prices as high as like $42 a megawatt hour were considered to be economic Respondent 1: It wasn’t. I think it was less than withholding. that at the time. I think it was maybe 55 because I’m going back to late November, early Because the rubric used to figure out how to look December and my recollection is that Edison at that question was engineering system-wide, actually entered into some contracts and short-run marginal costs. And if what you’re submitted them to the PUC. going to do is you’re going to reprice natural gas, which is what happened here to base and plus But then the PUC staff just sat on them because, transport, gas is not expensive. What’s O&M, and this goes back to the issue of wanting FERC two or three bucks? All of a sudden the whole to act first and the finger-pointing: “No, we don’t system is supposed to be clearing it at $40 and if want you to sign those contracts,” or, rather, the you offer above that, you’ve engaged in PUC staff is, “I’m not going to be eager to review economic withholding. these contracts for reasonableness because I may come out with some conclusion about the That was I think, an unfortunate journey down to reasonableness I’m going to be criticized for a sort of economically nonsensible outcome, but later, after FERC quells the prices, and I’ll get that’s what happened in litigation. And we forgot blamed for it.” And so, the PUC staff sat on it. all about the question about long marginal costs and how the price is ever compared to that. Now I said I was going to tell you one story out Which is probably a better question if you look of school, and I may do that and I think it was over a longer time step. probably in regard to those contracts.
Respondent 1: Yeah, no I just wanted to I was at a meeting, I remember it, Ritz-Carlton in comment on the issue that I brought up to you Pasadena and it was a small meeting and I guess about Speaker 4’s comments. Speaker 4, I don’t only about 10 or 12 people there. But Harold Ray think that you necessarily intended this, but I who was our COO, who was responsible for the
59 forward contracting going back into 1999, was Moderator: Thanks. Wow, what a history lesson frustrated during that meeting. Frustrated I know in reliving everything. Speaker 1, do you in conversation in coffee breaks and things, that remember back in the day when we were working he wanted John Bryson to confront the issue and at FERC together, you and Dick O’Neill and I’d decide on a considered basis one way or the other, be sitting down there in the gym on the treadmill whether Edison should just bite the bullet and or the bike and talking about these things, and sign those contracts and take the regulatory risks trying to keep Humpty Dumpty together? I guess on those contracts, even though the PUC staff was we didn’t succeed, did we? But it -- sitting on them. Respondent 1: No, but I know you guys said a lot And I don’t know if they ever succeeded in of concern about the market structure. joining that issue, but I know he was trying to get that issue in front of Bryson and have him not Moderator: Absolutely. But I think what’s make the decision by default, but make it interesting here is that we talked about the market deliberately. And I do know that Bryson at the design. But I think Speaker 4, your presentation time was very much inclined to think, “No, I’m hit on every little thing and Speaker 1 brought up not going to take on much risk. We’re going to another issue, is that we has the El Paso pipeline take this thing all the way.” explosion which reduced gas availability and increased gas prices. But my recollection was that it was a sizeable amount of money that might be at risk on the I think one of the biggest untold stories of this are reasonableness review. Like half a billion the air pollution credits or allowances with the dollars. Now, when you look back on it, at the South Coast Air Quality Management District amount of money that was spent during the Program where the price went to about $42 per duration of the crisis, spending half a billion pound of NOx. And when you add that into the dollars would have been a hell of a bargain in cost of generation, I mean we’re talking hundreds terms of somebody taking that risk. of dollars of megawatt hour for a CT. And that doesn’t get enough attention here. Obviously a Moderator: It would have taken a hell of a lot of bad hydro year. courage, though. One of the things we’re also missing is that the Respondent 1: No, that’s right. But I think John 2000-2001 winter was one of the coldest on believed that it was his fiduciary duty not to take record at the time. Of course with climate change that hit. I mean I think he was really somewhat, that’s not happening anymore. The other thing well maybe not embellish what I think he was that came up and I think Speaker 4 you said thinking because I don’t know what he was something about Dan Fessler, who’s a good thinking and I don’t even know if the issue was friend, and he was saying “Yeah, the U.K.” But ultimately confronted by him. you know what they really did? They took the Nord Pool model and applied it. If you think I just put that on the table to indicate that we did about how Nord Pool is put together with a power have contracts out there. They were submitted to exchange separate from system operations, that’s the PUC and there was some consideration at effectively what happened. It wasn't like the least among senior management, even if it was or England Wales Power Pool. was not the CEO, of just biting the bullet, signing the contracts and trying to solve the problem. So, with all of this perfect storm, and the bad That never happened. market design, let’s assume away the bad market design as a true economist. I’ll assume the can opener if you will. What if in spite of all those
60 perfect storm pieces, if we had the right market prices that were a huge political problem and a lot design at the wholesale level, would we be talking of people would say, “No, that’s not a just and about this as the California energy crisis? reasonable rate.” And if you had enough political backing behind that viewpoint and you would, if Question 1: Does that include bilateral you were subjecting enough retail customers contracting forward? those high prices. You’d have a problem.
Moderator: That includes bilateral contracting Question 2: So, question for everyone on the forward. If we had the right market design, soup panel. I was wondering how does the California to nuts, at the wholesale level. experience inform our current debate and discussions about market manipulation, using Respondent 1: Well, I think prices would have only financial positions under the head market? been higher for a lot of reasons, but I don’t think they would have been as spiky and I think if it Moderator: Well, the word Enron’s thrown was hedging around the spot markets, that would around a lot in every case practically. But I think have calmed things down fairly reasonably. it’s just rhetoric. So, I would say there aren’t really relevant lessons to be learned between There might have still been some pain in those two different eras and two different sets of California because prices would have been higher allegations. But maybe others have different anyway, I think. Because of the supply and ideas. demand fundamentals and other issues. The link between gas and electric markets. A lot of the Respondent 1: Well, in full disclosure the issues you raise. But I don’t think it would have questioner and I have worked on this problem been as disastrous as it was. I think it would have together. I’ve written some papers on this subject been manageable. and my starting position was if you don’t control generation in the real-time market then all you’re Respondent 2: Let me just respond for just a doing is using financial transactions in the day second. My response to that would be I agree ahead market. You can’t exercise market power with Speaker 3. If there were forward in the day-ahead market and you can’t manipulate contracting, because then it wouldn’t really it and profit from that. That was my starting matter whether there was a really high price presumption. because it wouldn’t have the same political implications. The questioner found some interesting writings from the financial literature changed my mind But if you combine, let’s say, a perfectly and then we said, “Well, here’s a way to do it in operating market, but still with a retail purchase the day-ahead market, under certain obligation imposed by California. And assumptions.” And it’s really hard to try to remember California shot back at FERC in exercise market power, but it does have certain December when they were, when FERC told empirical implications. them to get rid of their mandatory purchase and they said, “You don’t regulate the buyers, we do.” The importance of that paper was to say, “This is And so, they shot the PX. One of the more not a vague discussion about anomalous unseemly episodes of the entire encounter. behavior. You have to have this condition, you have to have that condition and there’s a series of And if that were the case, if you had a perfectly conditions. And so, that’s what we should be operating wholesale market, but you still had high looking for empirically.” The critical condition prices, and they were propagating through, I think in this theoretical approach is that you have to be you’d probably have better wholesale prices, but able to randomize your holdings that you’re in theory you could still have high wholesale
61 making, changing the price here and making Questioner: The key part was that sector energy money over there. [UNINTELLIGIBLE PHRASE] for others and the administrations changed. There were four So, the holdings over there have to be randomized other orders they had signed by Secretary and every trading period so that Andrew Stevens [UNINTELLIGIBLE]. So, Republican and doesn’t know what you’re doing. And if you can Democrat. pull that off, then you can manipulate the market and have a sustainable opportunity to exercise Respondent 1: Got it. market power. But the FERC enforcement of it could go, “Look, are you randomizing your Questioner: Saying that everybody in the West holdings and actually doing this kind of trading?” had to sell excess power that they did not use, or that they were overloaded in California and that That’s the empirical task and to the best of my the order said you get paid something. We don’t knowledge nobody’s ever done that, ever looked know what price. That would be determined, but at it. I don’t think anybody’s ever done it and I it was to be positive. It was the fear that nobody think it’s too hard. So, it’s not impossible in wanted to sell to a bankrupt entity and potentially theory. But I think it’s a really hard. The place bankrupt entity. you want to worry about market powers and equitable physical generation is in the real time, And so, Richardson, with Richard which we already talked about. [UNINTELLIGIBLE] who was chief of staff, ironically, issues an order saying that you must Moderator: OK, we have a batting order for sell excess power into California. You will get questions. We got to watch the Mets tonight by paid. You do not have to worry about the way. Go Mets. bankruptcy. That was in effect for almost 14 months. Question 3: Thank you first off, this is a terrific panel. And it’s great. I love history so this is a Respondent 1: That’s my answer. So I guess there great panel. Two quick questions. One, Speaker were two issues that were resulted. One was with 1 had brought up the DOE to see if somebody respect to the divestiture of the fossil units. They could remind us about that. But the bigger issue, wanted to be sure that utilities didn’t have market if I could go back to the legislation. power, and they would somehow utilize it in a way that would affect this new competitive My recollection, obviously I was far from it, was market. And it was a 50% requirement, not a the whole focus was on market power of the 100%, but it is said. incumbents. That was the rationale behind forcing the utilities to be 100% in the spot market. And then the other was, basically, there was a big And Speaker 4, I wondered if you could just give concern and I’m going to oversimplify this that us, what was the thinking at the time? What was some of the pushback for the PUC then, and that the focus at the time? Was that it or something was under Dan Fessler was a concern that, yeah, else that drove the idea for them being in the spot it was great for all the commercial industrial guys. markets? So, the DOE question and then this I want to go grab all that cheap Washington other question on the rationale. power, but we need to share that with the customers in general. Respondent 1: Well the DOE question, the issue, if I recall correctly, there was an order basically And so that was the idea that the utilities would that was effective throughout the West, basically basically purchase whatever they’re purchasing, that required people to operate the power plants. put it in the pool and then buy out of that pool as To make a long story short.
62 well and leave it as a wash, more or less. You it because I knew better. But you know, hindsight might have another perspective. is always 20/20.
Respondent 2: The only thing I would add is I Questioner: I wasn’t suggesting you would do it. think there was a lot of concern that the short-run I feel like some of these mentioned did. But her market would be very deep and liquid to facilitate hands were really tied at one point. Here’s the and encourage retail competition. That the retail, real point I want to make. The beauty of these competitive retailers would have a place to go kinds of panels at Harvard is, what is the lesson immediately and get some power. learned and how do we apply it into the future? That’s what I think we’re trying to do here. Respondent 3: And as I recall one of the arguments for relying so heavily on the spot So, I take away from all this, and this will be news market was it was an objective way to measure to some of your ears and some of you will push whether the utilities were recovering their back terribly. I think about all this is that capacity stranded costs. Because there was so much markets are inherently flawed. Because they’re confidence that the wholesale market would not really markets. We have to build in so many produce low prices. And a lot of confidence that rules in order to have these capacity markets for over time the utilities, because of the head room security-constraint reasons, for reliability between the low wholesale price and the higher reasons, for fuel reasons, for all kinds of reasons retail price, would recover all other stranded that they’re not really markets. costs. And the reason I believe we still have capacity Questioner: You’ve got a thing going on with markets, the reason I think we’re going to make valuing, trying to value [OVERLAPPING the same mistakes again, and again, and again is VOICES] and the cost. we now have a capacity market because most state regulators, common theme, like the fact that Respondent 3: How to value that objectively in they can point at FERC. And say, “Wow, look, the spot market was the mechanism. [AUDIO these capacity markets don’t work. Why is all CUTS OUT] this stuff not working?”
Moderator: —but didn’t the pipeline capacity, it So, isn’t really the lesson here it’s time to just, being out of service mean that they had to draw Speaker 1, I’m not trying to throw you a softball, down their storage resources for one? I care if you did although, [LAUGHTER] you’re perfectly capable of doing that. Isn’t this time to Questioner: —second point is Bill Fancy was just say to the state regulators, isn’t it time for chairman at the time all this started, right? He FERC to say, we got to get rid of these capacity was the one in charge with the commission markets. They are currently flawed. They’re not privilege, right? really markets, they’re administrative constructs. And until we do that, until we bite that bullet Respondent 1: Yes. we’re not going to learn lessons in California. Questioner: So, just [AUDIO CUTS OUT]. That’s my hypothesis. That Oak can offer you the There was, it depends. At the highest levels of softball first. I agree, you know, but that’s the government and I mean that literally. lesson of mine. [LAUGHTER]
Respondent 1: I’m not beating up on Betsy. I Respondent 1: As you know, I’m not a strong fan thought she was a terrific chairman. I’m actually of capacity markets. So, but there is a problem beating up on myself. I shouldn’t have voted for and which I have to address and Texas has confronted this problem directly, which is the
63 difference between the quantity of investment Moderator: I’m now remembering and I went to and the reserve margin you get with efficient talk to Susan because she helped us on this, in the scarcity pricing. That produces one level, order third refund case trial that you laid out, was it the of magnitude. In Texas I think the number’s like ISO operating reserve demand curve on top of the 13% or something like that reserve margin. California markets in 2000, and actually the Versus the one-day-in-10-year standard which summer of 2000, and found that given the tariff- requires like a 17 or 18% reserve margin. based triggers for those prices to exist that that validated the California summer 2000 prices from That gap between those two outcomes is a critical a demand-curve, operating-reserve basis. part of the story. So if you want to get rid of capacity markets you have to confront that Respondent 1: So, I’m a big fan of the operating problem. Because the market by itself with reserve demand curve. But I’m just trying to scarcity pricing will not produce one-day-in-10- respond to Speaker 3’s point here, which is you year investment in that level of reliability that can’t, as much as I might be emotionally in that comes out of these models. direction, you can’t wave your hands and say capacity markets should go away, if you don’t Questioner: I don’t disagree with that, but that is, confront that problem. in my judgment, putting aside letting them think that one-day-in-10-year is still the right Respondent 2: I didn’t mean to suggest that. But benchmark at 17%. Because it’s never actually for me, the ultimate question is, that FERC was, been implemented in a way other than in theory this is one of the questions that pisses me off the because, thank god, we’ve never gotten to that most. The FERC was never meant to be, it was point other than for reasons unrelated to the actual never intended by the Congress to be a one-in-10 basis. responsible entity for ensuring the retail load concern. That was never the construct of Commenter: But then partners are getting further [UNINTELLIGIBLE PHRASE]. And because of though, right now. The benchmark is not one in the restructure we have moved it away from the 10, it’s one in 50. The assumption is now one-in- state regulator, who should be responsible for it 10 actually happens five times in one. and it was statutorily responsible, FERC. And [OVERLAPPING VOICES] FERC can’t ultimately do anything about it.
Commenter: But the point is, that’s the problem And so, I do think the lesson that should be you address, is it should be easier to solve than learned, and I think you all, I think you’re right. continuing to have these artificial capacity The comparative lens is that California was margins. And I think that’s really trying to— ultimately compared to, California was the one who is responsible for it and California should Respondent 1: Well, I agree and we’ve written have been the one to fix it. Now I fear that we’re about this and made record, about this in the going to keep making the mistakes yet again and context of the Texas situation and said, the allowing the states, the state commissions and the capacity markets are not the only way to have a state legislators to not be responsible for the mess. higher reliability. Another way to do it is you They’re the ones that have the responsibility for shift the demand curve, the operating reserve reserve load. That ultimately to me has to do demand curve a little bit, which they actually did. something. And that has a lot of advantages to it because it provides the price signals at the right time and the Moderator: You should have been here for the right place. panel this morning.
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Respondent 1: So, you’ll be happy to know that were people who apparently intentionally California explicitly rejected the capacity market misreported natural gas prices to the trade press. because it will be under FERC’s jurisdiction. But that’s like a game of pennies. That doesn’t This is after a three-year settlement with all three move the price to $60. It moves it one cent or utilities and the ISO. So, that didn’t happen. another, wherever the index price prints. We’re now trying to come up with some sort of mechanism, RA mechanism which is going to be Respondent 1: I have one more comment. Yeah, probably even more problematic and I’ll just there were a lot of problems California could leave it at that because it’s a state issue. have fixed. So, what if you’re sitting at FERC and you’ve been moving to markets, you’ve And then your first point, and that’s why I opened the markets with Order 888. You want brought the letter because the reality is, the people them to work well and you’re faced with this who put this letter together, and I was part, there crisis. And you think a lot of the problems was a group of us that came out from California California can fix, but they’re not fixing them. and basically said, “Betsy, hands off.” Because And it goes on and on and on. And you see a lot we were concerned that there was going to be of the work that you’ve done to try to have some changes imposed by FERC. And so, your point markets with credibility is going down the tube. about the political pressure is absolutely true. What do you do? I’ll tell you. We should have And I want to underscore that here simply shut the thing down and fixed it. We should have because this is filled with legions. If you believe had the political courage to do it. And start it all the narrative in California, it’s “Enron did this to over. That’s my view. But we didn’t. We didn’t us and they brought a bunch of taxes and they do it. We let it go on for 13 months and then we picked our pockets and they ran away and FERC fixed it. And it’s very hard to fix a market in the let them do it.” OK. Well, that isn’t what middle of a crisis. Very, very difficult, but, and happened. OK. And one of them was that FERC looking in the rearview mirror, it’s easy to say was asleep at the switch. Well, when you get a this, but I think that’s what we should have done. letter signed by 53 congressmen, basically saying leave us alone, they did what they were asked to Moderator: Next. Let’s try to move through the do, so. queue.
Respondent 1: Moderator, just before we leave Question 4: So, this discussion is fascinating and the gas issue, I’m sorry. I just wanted to remind I’m actually now a little bit confused. And I’m people that,first of all, I realize the gas market curious to go back to the discussion among the nationwide was pretty squirrely during this speakers about market power, scarcity pricing particular time. But it was especially bad in and hockey stick pricing, but there’s also been California. It went up to $60 in MCF. discussion about gas prices. And I’m curious what the data shows about what the heat rates And I know that there was a lot of anti-depressed were and whether they were that much higher, hubbub, but I don’t know what exactly finally because I remember at the time the conventional happened to that, but there was a big hubbub wisdom being these prices were crazy high. And about anti-trust arrangements and restraint of then I remember thinking back to that in October trade on the El Paso pipeline. I just wanted to of 2005, and thinking, “Boy, those California remind people of that. And I don’t know if that energy market prices were actually not that bad at was resolved. all.” And then rethinking that same thought in the summer of 2008 and again in the polar vortex in Comment: But there was during that time, we 2014, where you see the markets actually having know by criminal verdicts and guilty pleas, there these kind of dynamics.
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So, I’m curious if there’s any data about the tell. So, the argument has been for people who extent to which the withholding and gas prices are trying to make the other cases, well, the way and heat rates were at an extreme level, and the manipulation was actually done was not by obviously the electricity market was tied to the the electricity market. It was done by hydro. Or, gas and if any of that has been parsed manipulating the gas market and manipulating out. And then I have a second question, which is the air quality permit market. Those two things. how much of the ultimate cost of the crisis was And that’s a much harder question to go back and due to the spot prices and having to buy power for pin down. My own view is no. That there are the bankrupted utilities, or maybe bankrupted very good reasons why those prices were high. utilities during the actual crisis? And how much But I think that’s more controversial. of the lasting impact was due to the long term contracts that got signed sort of at the height of Moderator: Next question. the market? Comment: So, for full disclosure Joel got me into Respondent 1: That’s an entirely reasonable this mess in 2000, by hiring me after SDG&E [UNINTELLIGIBLE] of the contract. filed their complaints so he gets the blame.
Questioner: I’m just curious you know, just the Question 5: Yeah, so I think some people in this balance of which is which. And then one more room are still suffering from PTSD. Having question is I’m curious if the price caps gotten into this sometime after the Blue Book and themselves, given the other market design flaws, with Dynegy from ’98 through ’02. First, just a had an impact of exacerbating some of the energy quick comment and it sort of goes to some of the market prices. issues going into the summer of 2000. One of the things people also forget is that 60% of the gas Because if you’re a generator, you can sit there generation fleet was 30 years or older. Many and sell in the day-ahead market in one market, units were 40, close to 50 years old. A lot of and you’re capped at like 100, but the balancing outages, and the generators of course were market is uncapped and you want to be available subject to paying the real-time price, if there was in that market because it’s much higher. And an outage, and that, looking back and thinking whether the price caps actually were the wrong about it, probably played a part into the solution to the problem. And the idea of just psychology going into the summer. going back and starting from scratch would have been better. Three questions, sorry. And then, the last thing is at a certain point we keep calling it a market, but probably by October Comment: Any thoughts on heat rates? I mean. it’s pretty hard to call it a market. I mean I think it was pretty well foreseen that with the retail Respondent 1: I’ll take the easy one, the first one. price cap that the utilities could go bankrupt So, which is as I said before there’s no pretty quickly. Prices were very quickly going documented examples of physical or economic above the $250 price cap and generators were still withholding of generating plants. That doesn’t being required to run at a loss. And once the 150 prove the negative, but we have— cap came in and you had a 90-day period between the time the market ran and the generators were Questioner: By now, one might surmise. paid, there was a crisis meant to happen.
Respondent 1: You would think. And that’s the There were so many things going into this and I statement which I think is completely straight forget who said it, the perfect storm analogies. forward. So, were the prices consistent given the And I think it’s true. My comment. My question natural gas prices? And the answer is, in heat is really, Speaker 2, in your comments you talked rates, and the answer is yes. As near as we can
66 about it was clear that the rules were being gamed which were sort of intertemporal arbitraged that during this period leading up to the crisis. And really the rules should have allowed. one of the things from my experience being at Dynegy is we used to tell the Cal ISO exactly how And you could say they were end goal violation, a proposed rule would be gamed and then they but that’s not how prices got to be $500 a would just put it into place. And history ran its megawatt hour. I’ll tell you who did really game course. the rules is PG&E. Because they were trying to figure out how to move their purchases, when But one of the things that I think that really they should move them from the PX, which had highlighted was a potential differential between relatively low prices and very high volumes, to the marketers for the larger companies, Enron, ISO which had high prices and low volumes. others and perhaps many of them with MBAs and And there’s a crossover point there. It’s just like otherwise. And those basically became the what you look at if you face a kink in a supply marketers for the utilities. I was wondering if you curve and you kind of would prefer your load not might be able to comment if you’ve ever looked to climb up that kink. So, PG&E, as I recall it, at how unequal perhaps the knowledge was going created a computer program, someone did. I into the market, how the markets worked between guess the company didn’t, but people there those who were working for the utilities, who created a computer program to figure this out. often had had other jobs within those utilities, before the market started. And perhaps those who And then they filed testimony at the CPC were in the larger marketers in the course of explaining how great they were for doing this. things. And we looked at this 10 years later and went, “People could go to jail for that now.” It’s a lot Respondent 1: You know I guess, I’m trying to like in the NEPCA fights about capacity markets recall exactly what some of the timing was in and the MOPR. Remember the [Dripe SP? terms of the Edison Company building a big staff, 6:10:30] report where all of New England but I think, I think at this point they really had decided to get together and figure out how can we quite a professional staff. I don’t think the save billions of dollars by just avoiding going up utilities were disadvantaged in not understanding that kink in the supply curve by doing economic a potential for gaming and the operation of the things? But that was sort of viewed as load trying markets themselves. I think that they were to reduce prices and, so, nothing really every probably of comparable sophistication by this happened. time as Dynegy and other marketers. That’s my recollection. Question 6: Well, thank you. This has been really informative, especially as a transplanted Although I do recall that we even beefed up Westerner. So, if one of the major lessons is that things all the more during the next few years. So, you should have load serving out of these, cover my memory on this is a little bit muddled, but I their positions by forward contracting, I wonder think there were plenty of sophisticated people on how you sort of apply that lesson to today’s the market. They were employees of the utility. circumstances in the West where you have all sorts of different business models on the part of Moderator: I actually meant to make a comment LSCs. myself about the reference to gaming the rules, and I guess stepping back on it, what I would say You’ve got the California IOUs, which by is they’re all the colorful names that the Enron regulation are supposed to be indifferent memo used. Most of which had only a glancing financially to the contracts for RA that they effect on clearing prices, if any, and a number of signed. There’s always ways for them to make or lose a little margin in it. You have the other IOUs
67 in the West who stand to gain financially by that whole debate might tell us in the context that overbuilding and over-complying with resource we are today. adequacy through rate base. Respondent 1: At IEP we used system weegee. And then you have the CCAs and direct access It’s as accurate as anything else out there in terms customers who want to under-comply probably of determining what you need in the future. on the hope that someone will either ride into save You’re actually hitting on an issue that is them, or that the guys who are financially surfacing and I suggested this earlier, that there’s incentivized to overbuild will have to pay the this 2021 problem showing up, and people are costs. And they’ll just be able to kind of going how being all 50 megawatts or even 500 regulatory arbitrage around to steal the business megawatts off what you thought was going to of the incumbent IOUs. happen in 2021 is probably understandable. Being 2500 or 5,000 megawatts off is pretty You introduce that to a scene which has more and significant. more questions about the sort of forward capacity that resources actually dependently deliver, and A couple things have happened. One, the coal you get a variety of different response. I mean wars have been largely won in the West. There’s two different state regulators can look at the same a lot of coal capacity shutting down. Which wind farm under two different sort of integrated means the natural gas plants that were built in resource-planning scenarios and come up with those sectors are staying where they are. Two, a two radically different answers of the amount of lot of the states in the West have adopted policies, capacity that wind farm can be said to deliver. RBS policies and green policies that basically Some people are using ascendant methodologies mean that a lot of the gas generation that used to still. Some people are using ELCC. Some state come into our import market may not be there. commissions are still using educated guesses that And so, this is putting a squeeze on it. And the were found in 1990s National Lab reports. That’s other issue is we recalculated our ELCCs and what I did when I was a regulator because there reduced fairly significantly the amount of didn’t seem to be a lot of better evidence. capacity we’re expecting from solar and wind. OK, so those three things have all converged at a And, so, I agree with all the criticisms of a point in time where it’s gone like “Holy moly, capacity market which sort of defines what these we’re in this mess.” product are and are worth, and sort of centralizes the disposition of questions about what people So, the ISOs brought this forward. They’re need to carry. In the absence of that, you have working cooperatively with the PUC. We’ll see this sort of scattershot, multiple-state regulation what happens there. Now, the scary part. The that tries to impose capacity requirements on state having been through this all at once is trying load-serving entities, but often doesn’t do a very to figure out how you do it. The utilities are good job of checking their math and doesn’t going, “Well. why do we need to buy this stuff check the math of the entity they’re regulating because our loads going off the CCAs. against other entities, and certainly not against Community Choice Aggregators?” These are other states. muni likes. They don’t really have anything to them other than the fact that they were joint That seems to be the main pitfall of the argument powers agency. because the West is always dependent on interstate transactions for capacity. It’s never So, they’re going, “We don’t need to be buying been one state can just regulate its own capacity this stuff because we’re losing customers.” The and its own resource adequacy. It always ends up CCAs in some cases aren’t really positioned to being reliant on others. So, I just wonder what buy a lot of this. This has become a debate. In
68 some cases, they’re doing a great job. In other San Diego Gas and Electric is almost there. I’m cases, not so much. So, now it’s, “Let’s come up not sure what we think about this in this new with a central procurement entity.” OK, so now world with CCA. So, when you talk about their hairs are going up on the back of my neck, California, you wouldn’t believe how many balls going, “What does that mean? Does that mean are in the air right now. my PUC is buying power on the behalf of everybody out there?” Question 7: Thanks. Just a question. Now these are not adjusted for inflation, but I’d just like to And this is the PUC who believes that, as gas understand is there still a problem in California plants go away and prices go up, that’s market with the markets? Because if we go back to power. It’s not shortage. It’s market power. So, [LAUGHTER]. Yes. that’s what’s next. OK. And there may be in fact legislation next year on this. So, that’s the next Comment: No, there’s no problem at all. step and , as we go to more DER and other stuff, we atomize our system in such a way that the Comment: Well, just to put it in perspective, in question of who is responsible ultimately to keep ’94 they were paying $100 a megawatt hour for the lights on becomes a little less certain than retail. For all markets. In ’98, or ’99 they were perhaps it used to be. paying about 90. And then through the crisis and everything it jumped. By 2006 to about $130 a Respondent 2: Just as a historical footnote, megawatt hour. Gas prices went through the roof California has not always relied on out-of-state at that period, but now gas prices have dropped capacity. Although you’d have to go back to the significantly. And they’ve gone up to $160 a 1970s, back to a period that I actually remember. megawatt hour now, across all customer classes I started working for the utility in 1965. And back in 2017. That’s 2017. then we simply did economy purchases, this is when the utility was in charge in no uncertain way I don’t know how high they are right now today. of serving the load and operating the system. And But are the markets part of that? What’s they had enough capacity to serve all their happening that’s just driving prices sky high customers, and the economy purchases were there? economy purchases. Now that’s long gone. Moderator: I don’t know renewables, but one of I just wanted to add as a footnote, I just wanted the things that’s underneath all of that is the ISO to emphasize that as one of the institutional ways clearing prices have remained quite low for a long in which the industry has migrated far from that. period of time after the crisis, which is what my And the other side now were at a point where the long arm cost point was. If you look at utilities have been asking themselves for some contributions towards margin and how you could time, “Why are we procuring?” I retired 12 years fund a new plant, those studies which Hildebrandt ago, and this goes back to a period before I has done for many, many years, there’s this little retired: “What’s in it for us? Why are we buying small tail to them now. this power?” It’s an all-risk, zero-return business. And so, I’ve always kind of wondered what the We had lots of people internally, and now with bid deal was, because if you wait 13, 14 months the CCAs, you’ve got even more people saying, the whole problem went away, but I lost that “What are we doing in this business?” argument. And I don’t think I’m telling any stories out of Respondent 1: Well, let me see if I can add to the school, because I’m actually not in school confusion. The renewables have been interesting anymore, but PG&E, I think,would be perfectly and I represent wholesale renewables, not the willing to get out procurement all together. And distributive guys. But we’ve got about 11,000
69 megawatts of utility-scale solar and I think respect to the gas lead, so this is a significant issue probably 7,000 megawatts of wind. Six to 7,000 coming forward as well. How you price that is a megawatts of wind. And then from geothermal big issue. And so, that’s an area we need to pay and biomass, the issue that was talked about this attention to and then, last but not least, the other morning with the solar now is, in terms of big thing that’s popped up to the ISO is we do wholesale prices, two to three cents to build it and have periods of time in the winter where you the marginal cost in the middle of the day is zero. know you don’t have sun and you have very little And that’s created a big problem for the gas lead wind or whatever. because that’s where you used to make your money. The Germans have a word for this because they have a January. There’s two weeks of that The gas lead is not needed in the middle of the happens to which they fire up their lignite. So, day. It is absolutely needed between five and it’s a longwinded answer to say that the market 8:00 at night. Otherwise the lights go out. And there is really in flux and we have all these little the gas lead has shrunk significantly since the different problems that are popping up. And a lot discussion we just had. We had once through of policy decisions that are trying to push things cooling, so all those old Eisenhower plants up and into other types of technologies that may not down the coast were basically given 10 years to really fit particularly well. That’s your future. shut off or repower. A number of them were That’s kind of why I’m here. repowered. The last one wasn’t. That’s an old, I need alcohol in order to talk about that one, but Comment: How fun. the reality is that while the rest of you are talking about replacing your coal plants with gas, in Moderator: I see more questions. California gas is the new coal. So, we’re fighting, Question 8: All right. So, I do have a question we really get defensive action there just to keep which is not intended to be rhetorical. It may end the gas plants that we have functioning in the up being that way. market. So, that’s one of the issues right there. That the number of gas plants have shrunk. Moderator: Why am I not surprised?
As I said earlier, the PUC is now seeing that as Questioner: I think what I really want to take market power because you have fewer plants away from this is lessons learned for today from providing that power and then, in their minds, the what happened 25 years ago, or however long ago prices go up, that’s a reflection that someone that was. And then he sort of deflected and went obviously has market power. So, that’s a key off into a diatribe against capacity markets. But I problem there. And so, in terms of the energy want to think about where we are today. prices, we’ll see how this plays along in terms of the energy market in general. The big problem is, To me, an overarching lesson here is that you is the ISO just pointed out, as I said, the issue with shouldn’t set market design under political respect to the kind of the shrinking RA for lack of duress. That seems to be what happened there. a better description, but a big problem is we have And I think we are moving back into a time in a December because of the way this works. We which there are political pressures, at this have a December ramp of almost 15,000 particular time from two sides. From states, this megawatts in three hours a period of time. So, we is particularly difficult in a market that has just talked about the import shrinking. That’s multiple states with multiple political goals. likely to happen. So, I’m thinking of PJM or New England. Think And you have just a fixed amount of internal about how difficult it was in California. That’s at generation that can come at a drop of a hat with least one state with one ostensive political goal.
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And then you have pressure on the federal side. That’s the way I feel about it. Somehow market This is what I was sort of getting at when I should prices need to arise from a good market design, not have spoken out of turn. But we’re now not from political decisions that are made along dealing with a pressure to plan to reliability the way. And there’s no way for it to be pure. It standard far beyond one intent. It is now typical never will. Because everybody who gets these for black swan events to be part of the modeling jobs are political animals. But I think the political parameters you’re looking at when you’re courage to do the right thing regardless of the assessing the grid security in terms of resilience criticism is in short supply everywhere, right or fuel security, fuel assurance, et cetera. now. And I think regulators need that as well.
I think a lesson is to not act and create the market Moderator: Next question and then one more design based on these political pressures. I’m brief one. wondering if folks on the panel have sort of responses as, or thoughts on where we are today, Respondent 2: Because I think the reality is that the best way to move forward. Is there an answer the electricity policy is set politically. That’s just to what’s going on in California? Is it going to a reality. And what we’re facing going forward differ across regions? I’ll throw that out there. is basically the political community and a lot of citizens want cleaner energy, green energy and Moderator: Does anyone want to bite on that? whatever else.
Respondent 1: Yeah, my view is that electricity It’s a big issue. Part of the market design is to is probably the most politicized commodity in the figure out how to get stuff done. So, the market country. And, so, you can’t take all the politics design in and of itself isn’t the mission. It’s like, out of it. “How do we do that? And I think at one point in time, certainly the time we were talking about, we Moderator: Why is that? had shifted into a more retail world and the discussion we’ve had today is largely OK, if we Respondent 1: Well, FERC Commissioners have had to do it all over again, how would we have to go through a hearing. You’re jerked up on done it because we obviously ran into problems Capitol Hill all the time to testify. We were in California. during the California crisis and when we proposed standard market design, we had our But going forward I expect this to be politically heads handed to us. So, you can’t take the politics driven. And then the question is how do we out of it, but you’re hired to do a job. You take structure markets based on what we know to an oath to do a job and if you know something’s basically meet outcomes that are acceptable? My wrong, or you suspect it is, you need to pause and biggest concern is being an advocate for try to figure it out. renewable energy and everything else, is we screw it up and we have blackouts as a result of And I think FERC is facing that now in all sorts the fact that we did not plan for the fact that, you of ways since state commissions are, too. And if probably don’t know this, but every 12 hours you’re going to have markets, you need to design there’s an event that happens with the sun going them well. I mean other kinds of markets perhaps down. don’t need to be designed quite as well. Electricity markets need to be designed well to And how do we deal with this? That’s not an work, or they don’t work at all. And the second insurmountable problem, but it’s one that in the thing is you need to protect the market from world I live in the state capital is just assumed outside influences. Otherwise just go back to away. And so, trying to come up with markets regulation.
71 that actually work and are based upon things that used to retroactively trade credits, capacity we know can work, I think is very important. credits. The markets developed one. We had the energy cap problem which is why we have to Respondent 1: Economists assume it can’t, have capacity markets that Speaker 1 doesn’t like, California assumes away the sunset. Is that what but that’s why. that means? Two, then we further developed them because it Respondent 2: We assume storage. Apparently turned out, I was at that company too, PSEG gave there’s an unlimited amount of storage and PJM about 30 days’ notice that we were going to everybody should have it. retire a power plant and PJM said, “Oh, we have a problem. We need more than 30 days.” So, Moderator: Very briefly. capacity markets have served and evolved to meet the needs of the systems planner and Respondent 1: Just real quickly you know you reliability. And to give it back to the states is to brought up the one-in-10-years, et cetera, and I, take away a very important planning tool, an just based on my experience in the industry, I economically efficient tool that has evolved to would take all that reliability modeling with just meet the differing needs. a huge grain of salt going back to my early QF days back in the early 1980s. Just trying to figure You can call it whatever you want going forward, out, well, what’s the right reserve margin and hey, but this morning one speaker told us, “You are what’s the probability? going to continue to have to have resources that have specific characteristics.” You can call it So, I talked to our system planners and I basically capacity, you can call it ancillary services, but at said, “Well, how do you know it’s one-in-10?” some point this “administrative revenue stream” “Well, because we adjusted the models to fit what is going to have to be there to keep reliability. the operators felt comfortable with.” And so the operators went back in history, recent history and said, “Well, I felt comfortable in 1977. I thought that we had a nice reserve margin, so calibrate all your computer simulations so that they produce a one- in-10 year in 1977 and go forward from that.”
Let’s be real. We are engaging in what the military calls a reconnaissance in force. That’s where you have to move so fast that you don’t send the scouts ahead of the troops. You just go out there and when you engage with the enemy, then you know where they are. And we’re in the same process right now, going into uncharted territory in terms of ramping capabilities and how much gas can we shed, and how is solar going to work anyway? I wouldn’t take any computer simulation models too seriously.
Question 9: Yeah, I just have to say something about capacity markets. Everybody seems to be blaming the competitive market. Power pools had capacity markets. I was at PICO when we
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Session Three. Utilities on the Customer Side of the Meter: Issues and Challenges
Market penetration of demand side management, demand response, and distributed generation, on the customer side of the meter, may well be the fastest growing business opportunity in the industry. That growth is in remarkable contrast to the lack of substantial growth for traditional regulated utility activities. The contrast has led many utilities, both vertically integrated and distribution only, to consider increasing their presence on the customer side of the meter. There is an element of déjà vu to this, given that many electric companies had been engaged on customers’ premises from the beginning, including selling (even giving away on occasion) appliances, providing electrician services, and, of course, running energy efficiency programs. Some of those activities, have, for a variety of reasons, fallen by the wayside over the years or utilities maintain demand side management programs without earning a return on those efforts. Utility managers see many new actors providing services on customers’ premises, and this is an opportunity for their companies, a natural fit given their knowledge and relationship with the customers. Many of the strengths utilities possess may be more of a barrier than a facilitator to entry. There are many players in the demand side space. They see that market as highly competitive, a status that would be heavily disrupted by the entry of the local utility. Furthermore, rapid technological change requires innovation and adaptation, as well as risk taking that has not been characteristic of the culture of heavily regulated utilities. Thus, many non-utility players in the market contend that those actors best equipped to operate and innovate in the market would be at a competitive disadvantage to a player less equipped to do business in the space. Would expansion of regulated utility activities on the customer side of the meter enhance efficiency or stifle innovations? Should such activities be treated as regulated or unregulated businesses? How can regulators strike the right balance?
meter. And obviously that includes a broad array Moderator. of demand-side resources, including self- Good morning, everyone. Let me just briefly go generation or rooftop solar, for example, but it through the ground rules again, for those of you also includes all those kinds of services. And that weren’t here yesterday. The ground rules are there’s two fundamental questions which are fairly simple, that everything is not for raised in the panel description, which the attribution. panelists will address.
There will be a rapporteur’s report. But the One is a question, somebody described it as an rapporteur’s report will capture the substance of anthropological question. That is, since utilities, the discussion, but no names will be mentioned. because of their regulatory environment, are In addition, after each panelist makes his or her trained to be risk averse, and the customer side of presentation, we’ll take clarifying questions for the meter involves a lot of changing technology, that panelist, clarifying only. And then when the rapidly out, basically technology that gets entire panel’s done, we’ll take a break, and after depreciated in terms of its usefulness more the break, we will open it up to discussion, quickly than the physical asset. Are utilities, substantive questions, and whatever you want to either culturally or from an economic incentive talk about. And put your name card in the vertical point of view, best situated to do that kind of position if you want to be recognized, and then business? Or does it require more of an I’ll call on people in the order that I see them. entrepreneurial mindset. That’s sort of the anthropological question. So this morning’s panel takes a look at what the role of the utility is on the customer side of the
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And then there’s the antitrust question. One of transferred to a utility holding coming providing the things that’s fascinating about the electricity these very services of efficiency service out to industry, if you go back in history, is the early industrial and commercial clients. And then I utilities sold appliances. In some cases they decided to switch over to a private company, or actually gave away appliances just to get people so I thought a private company. I joined a firm to use electricity. And that raised a lot of, if not that was an energy service company, providing antitrust, certainly competition policy questions. these services out in a more broad sense, only to And we’re trying to frame this broadly. So it’s find out after I joined, it’s majority-owned by yet not meant to fit in with the arcane concepts of another utility company. And then I worked for antitrust law, but to fit into a broad sense of that company for several years, and then lo and competition. behold the owners bought it out, and then we were bought again by another utility holding And then, of course, the utilities have access to company. customer information in most states, if not all states that control the meter. They have a long So I’ve had a little bit of utility holding history of relationships. So the power of the companies in my background, but doing energy incumbent can be quite strong, and what’s the services for most of my career, left that job and effect of that on competition policy when the went to work for the US Department of Energy, utility is engaging in business. On the other hand, where I ran a program called the Federal Energy utilities, when they see flat revenues, or in some Management Program, managing the energy cases declining revenues, may be looking for efficiency of all the federal government’s areas where they can grow, and obviously the buildings. Before I left that, I became the deputy customer side of the meter is one of those options. assistant secretary of renewable power, so for two So that’s the broad contours of what we want to years, under the Trump Administration, I did all talk about. Speaker 1, who comes from the of the renewable power research of the customer services industry, and will talk a little Department of Energy and managed that portion. about where he sees things going, and then when he’s finished, then Speaker 2 will talk from the Then I left that just a year ago and became the standpoint of what they’re doing from a utility executive director of the National Association of perspective. I don’t want to stereotype you, but Energy Service Companies, a trade association that broad perspective. Then Speaker 3, who’s that manages the industry that does energy worked a lot on these issues, will talk from a savings performance contracts done by ESCOs, broad policy point of view and experiential point energy service companies. We do performance- of view. And then our cleanup hitter will be based contracting in this industry. We come in, Speaker 4, who’s going to talk more about the and we do the energy retrofits to make buildings competition policy issues. So Speaker 1? and infrastructure improve in operation, and we use the savings we achieve from that Speaker 1. improvement to pay for it. Thanks. I think I drew the short straw, and you get me first, the comic relief of the morning. So Usually there’s a bank or a financier behind the I’d like to tell you a little bit about myself. I’m deal that comes in and provides the money, and an electrical engineer, power engineer by then the energy service company will measure training. My first job out of college, I began and verify the savings for often 10, 15, 20, up to working for a utility and then quickly was 25 years for federal government. Most projects
74 run around 20 years of the projects installed. And energy efficiency as you could, and then you then that savings will pay down the note over that began to install renewable power. There were term as well. This industry is primarily done on two primary departments, the office that ran public buildings, so federal government, state energy efficiency, and mine that ran renewable government, cities, counties, universities. power. They were always butting heads over Hospitals get involved in it as well. And it does which one should get priority. Perhaps you’ve require specific legal allowances for us to do this heard of it in California, some of the issues with work across the country. There has to be laws in the homebuilders, where they have efficiency place in each state and in the federal government requirements for the homes for more insulation for this to be enacted. and so forth, but perhaps the standard for carbon reduction could be met also with solar panels. The industry size overall, based on the last Lawrence Berkeley National Labs study, is about And it turns out the builders have found that those a $7 billion annual industry across the country. It buying homes would rather see solar panels on is growing internationally, but the international their roof than more insulation in their walls. It markets struggle at times with how they helps the home price. They can get more money recognize the debt that’s accumulated based on out of it. And so there’s a battle between these projects, especially in Europe. They’re renewable power and efficiency right there in the challenged with it, but some of those laws are also state of California in the residential market. And changing. We’re seeing some growth that continues today. I’ve heard some argue that internationally as well. if we have a grid with more and more renewable power, and the power’s all green, why do we Our market is also changing with new market bother with efficiency? If all the power is green, entrants. We see changes with the way the work what does it matter how much we use? Our is done. A new type of service called energy as a carbon is still neutral in that case. And I’ve heard service, where today my companies will do the those arguments as well. work, and the equipment immediately becomes the ownership of the customer. New entrants are Well, one of the things that I believe is, as I was coming in and taking ownership of that building at Department of Energy, I ran an effort called the equipment, owning the boilers, the chillers, the grid modernization initiative. And it was my air handling systems, potentially even the lighting glory days to get back to my beginnings as a systems and control systems, intricate small power system engineer to get more into grid pieces within a building they’ll own separately design, development and research, and it and operate and maintain, and then sell the overall becomes clear that renewable power that we call service out of those components and equipment solar and wind is really only about 7% today. 1% and energy into the building as a service, of that’s about solar, and the remainder is wind. providing their operational needs. Now, wind is growing very rapidly. Wind just recently became larger than hydro as the largest So as I look at the efficiency world, we’re talking renewable power in the country. But when we about energy efficiency. We’re talking about look at the grid with those types of sources, it’s a services going into the customer side of the meter. different operational paradigm than what we have I see that it’s changing. While I was at today. Department of Energy, the policy always was that you did energy efficiency first. You did as much
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We all understand today, most of our power much current flows, those things trip, and it’s today, even still, comes from fossil-fuel because the generators that we use today have the generation and nuclear generation. And those are ability to supply an infinite amount of current, old generation types that we think of as stable theoretically, which causes those things to trip. power. They come from big generators that we can control, and we can dispatch, and we can When we switched over to an electronic supply, impact how that power is generated and like solar and wind is, the circuit no longer has distributed on the system, to new renewable the ability to send as much current as is needed to sources which are somewhat dependent upon the trip those, and so when a wire falls to the ground, environment of which they exist, and our ability it just continues to send electricity into the Earth to control those is often challenged. and never trips the circuit breaker. We have to have a change in paradigm of how the grid And another piece of that that us power system operates to handle such strange circumstances engineers talk about is what we call grid services. and the physical conditions that this presents to They’re these other things that are part of the grid us. operation that are beyond kilowatt hours and kilowatts, such as voltage support and frequency So when I look at efficiency, our grid is not support, that are very critical to good operation. prepared to handle a full renewable slate of As we installed, in the history, the big fossil power. Now, I think my own state, Virginia, says generators, these big induction machines is what that they want 30% by 2030, and 100% renewable we call them, these grid services came with the or fossil-free generation by 2050. And so that’s kilowatt hours that we wanted, too, badly. When 30 years from now. And we think that our grid we installed the new renewable type systems, we that we’re getting power from today, some get these kilowatt hours, but the grid services that components of it might have been built about 50, we’ve grown to depend upon that came free with 70, 80 years ago, and we’re still using it. And it the other systems don’t come with the renewable represents technology of 50, 70, 80 years ago. power systems. The renewable power systems, And so as we look at this grid, it has to change in solar and wind, are often fed through an inverter, some way, shape or form to handle a more through electronic devices into the grid, as dynamic load, and handle a more dynamic opposed to directly from an induction-based source, which is something we have not generator, which is what we have on the grid experienced. today. Today we think of our dynamic wind and solar And that poses changes in how we have to operate that constantly change up and down, the power the grid, and changes on how we understand the goes up and down, and we think that’s not grid operates. This is a simple example. We all acceptable. But our load has always changed up have homes where we have circuit protectors in and down. Our load has always been dynamic. our house. We put too much load on the circuit, We’ve even developed programs to try to flatten we run the vacuum, and then we run the the load in the daytime to better match up to our microwave, or we run the TV off of one circuit, generation. And now what we’re talking about is and all of a sudden it trips. And the reason it trips throwing batteries everywhere to try to make this is because too much current flowed through there. new type of source flat and level like the old one Our power system today is built with the same used to be. My vision of the grid is that the grid type of protection you see on the poles. When too will be a dynamic marketplace, and these grid
76 services that I talk about that are so elusive will buildings. And so that’s where I see efficiency be supplied by many different places, from the flowing today and where I see it going. batteries, from the generation, but also that can come from the load side. Moderator: OK, thank you. Any clarifying questions? So, Speaker 2. And I think that’s where efficiency plays a role. Efficiency becomes important because we need Speaker 2. these things to control the grid. Batteries can do a OK, good morning, everybody. I am a manager lot, but they can’t necessarily do everything of customer technology, product strategy and economically. I think we’re just now entering development. My team is relatively new at my into the age of batteries, getting large scale utility, and we are very uniquely situated to do battery installations. We don’t necessarily know some of the things that we heard Speaker 1 how those will perform over long periods of time. speaking of, and I really view my team as the What environmental impact those will have, and bridge between what our customers want and so we need to think about how we can supply what our system needs, which is kind of a those grid services otherwise, as well. We call it different approach to how we’ve engaged with smart buildings. I call it efficiency. Efficiency customers before. We used to always start with and smart building go hand in hand. When we do reliability and system needs first, and we’re kind an efficient retrofit today of a building, we don’t of flipping that now and starting all of our expect the building to get worse. In the ’70s, engagements with our customers with what are when we did energy efficiency, we expected to be your challenges, and how can we help you solve cold when we wanted to be warm, hot when we them and identifying mutually beneficial wanted to be cold, and we thought it should be solutions that meet our customers’ needs and also dark when we wanted it to be light. provide value to our system?
That was efficiency in the ’70s. Today, So that’s the lens through which my team looks efficiency means we expect the light to be better, and works, and so that’s kind of the context for the building to have better indoor environmental my presentation here this morning. So this is a conditions, and we expect it to be better quick snapshot of my utility so far. We are the temperature controlled. So we expect more out largest utility in the state of Arizona. We serve of our buildings when we do an energy efficiency 11 of the 15 counties in the state. This slide is a retrofit. In many ways, the smart building little bit old. What I will say is, when this was put movement is what we see coming in, and really together at the end of 2018, we were already more what smart buildings are, are efficient buildings, than 50% clean. We were the second utility in the and those smart buildings will be able to provide nation with regard to residential solar customers, these grid services back to the grid to help balance and a little bit over 1.8 gigawatts of total out some of this renewable power fluctuation that renewable capacity. we see happening today. That’s only continued to grow. In fact I was And then there’s also this crazy idea of resiliency sharing with the Moderator earlier that in August that comes in, and I think what we’ll find is that of this year we hit our 100,000th solar installation efficient buildings and the smart building control on our system, and we were over one gig of solar are what we’re going to need for resilient across our system, and that includes all residential solar utility-scale solar and APS-owned solar. So there’s a lot happening in our state. And we’ll 77 talk more about some of the other things on this implementation of the first tranche of our CP, we slide. continue to see increased in applications. In August of 2019, we actually received over 2,900 Let’s dig in a little bit more on the distributed applications. market here. You probably have heard that the value of solar was a drawn out discussion in our So we continue to see a significant adoption state, as it is in others across the country. In fact, across our territory. Regionally, our resource that’s how I got to meet the Moderator. He needs continue to change. Our peak loads testified in that proceeding for us. And we were continue to grow. Our state is a place where told that what was being discussed at the time was people continue to move to. We are, if not the going to kill the market. And that our rate case first, we’re the second largest county, in that happened just on the heels of the value and Maricopa County, which is where the Phoenix cost of solar proceeding would be even more metropolitan area is located. And load does detrimental to the market. And that’s not what continue to grow for us, so that peak hour over we’re seeing bear out in reality. summer continues to be a challenge.
Despite what the commission found in the value Meanwhile, the winter net load continues to and cost of solar, and subsequently what was become deeper as well, because of all of that solar approved in our rate case, we continue to see that is being installed across our service territory. mass adoption across our service territory. So So again, that problem just keeps getting worse. this just represents of all the solar in Arizona, I’m not taking a position on what a renewable most of it is in our service territory, which makes goal should be. But as we look at how do we sense, given that we’re in most of the state. We become a more carbon free society, and how do see more applications per month on average than we look for new ways to reduce carbon across the all of the other utilities and co-ops combined. So board, this just is illustrating that as that there’s quite a bit of activity continuing in our renewable goal alone continues to increase. You service territory. Again, we are ranked second have to produce more than three times your among the largest utilities in residential solar customer load in that period, and that penetration, and we keep seeing more and more operationally is obviously a challenge. of that every day, which helps us kind of look at how do we incorporate different solutions to help I wanted to talk a little bit more about solar manage and integrate that generation successfully overproduction. We are obviously located very into our system. ideally on the footsteps of California to our west. We’re seeing increasing numbers of curtailments So diving in a little bit more into the value and across the region, and we look very closely, on an cost of solar, one of the outputs of that proceeding hourly basis and an intrahour basis, to try to was what was called the resource comparison maximize those opportunities when solar proxy. We didn’t end up at the end of the value curtailment is happening across the region, and and cost of solar with an avoided cost we can bring that into our system and maximize methodology. That’s still to be determined at our that on behalf of our customers. corporation commission. But the RCP is a calculation that was a methodology that was We are a participant in the energy imbalance determined through that proceeding, and it has an market. Earlier this year we made an annual step down of up to 10%. And even post- announcement that we were going to be investing
78 in up to 850 megawatts of battery storage by 2025. That is a commitment that our company is A little bit more about those observations I was still very much working towards. just talking about. This graph or chart, rather, depicts the 2017 load profile as compared to the You might have heard about an incident that 2018 profile. While that’s meaningful because occurred at one of our utility-scale battery storage our rate case was approved in August of ’17, we facilities earlier this year, where unfortunately were trying to show year over year comparison. there were some injuries. So we have not The change, getting into the on-peak period, has continued to execute on any of those contracts gotten even deeper. There are days where you until that investigation finishes. We want to make can see drops heading into our on peak period of sure that if there are any lessons to be learned 60 to 80 megawatts and sometimes more. from that event, that it’s applied to any future projects. But, nevertheless, it is not derailing our But there are real behavioral changes. Now we’re commitment to that 850 megawatts by 2025. It’s also trying to focus on what happens when we get an important part of this solution. to the off-peak period, and we start to see a little bit of snap back, especially when you can We have a variety of ways that we’re working to combine a DR then at the same time. So we’ll deliver a clean energy future for the state of talk a little bit more about that. Our rewards Arizona and our customers. It’s a combination of program came out of a demand-side management everything from modern rates that we worked plan that was approved by the Arizona towards in our last rate case, which we’ll talk a Corporation Commission, and it was designed to little bit more about in a moment, to distributed try to maximize value for our customers, as well and utility-scale solar energy storage, like I just as balance that against the operational changes discussed, and then we’ll talk later about the that our system was seeing. It had a horrible rewards program and demand response and how name at first, and it was rebranded “the rewards we see that growing in our service territory, as program.” Our engineers named it something well as microgrids and transportational like Dreslem, and nobody liked it. We got yelled expectations. at at the commission. It was horrible. So now we have marketing involved in all naming. So at APS we have one of the largest time-of-use programs in the country, and following our last It’s called the rewards program. We’ll talk a little rate case, which was approved by the Arizona bit more about that. There’s three components, Corporation Commission in August of 2017, the really. The core rewards program, which is our number of customers on a demand rate, a three- smart thermostat program, there’s actually a typo part demand rate, has more than doubled. And on this. We now have over 16,000 smart we are seeing actual behavioral changes as a thermostats that are enrolled in that program. result of those rates. We’re very excited about the And this summer was the first complete summer potential benefit to the grid from these more where we ran this program, and we’ll talk more modern rates. They’re obviously designed to about some of the results from that. encourage our customers to ship their load outside the on-peak period, when it’s cheaper for But there are all kinds of benefits that can be energy to be produced or procured. And it realized from a program like this, which I’m sure increases the opportunities for us to deploy DERs you’re all very familiar with. Not only can we and DR across our service territory. reduce load, but we’re also testing precooling as
79 part of this program to see if we shift some of that happen all the time. You do a plan for an load into the off-peak, what that does to the emergency. customer’s rate at the end, or during the on-peak. We also have the reserve rewards, which is a The dynamic nature of these resources is really connected water heater program. We have about where we want to get. What does the future hold 300, I believe, is where we’re targeting to end up, for us? As I talked about earlier, we are very but these are all, actually, if I could go back, we uniquely situated in the way that we get to engage were recently jointly awarded the CEPA with our customers. We’re very much committed Innovative Partner of the Year award with Energy to transportation electrification. Maricopa Hub for this program. So we’ve partnered with County is non-attainment, and it is going to be Energy Hub to establish our resource operating important for us to really get to a significant level portfolio, and so all of the connected devices that of adoption in not just Maricopa County but in the our customers opt in to participate in the rewards state of Arizona. We’re also a transportation program are operated through this resource corridor to our neighboring states. So we want to operating platform. All of the water heaters are make sure that we are establishing a good also connected to this system. We also have a infrastructure that people can rely on when storage rewards component. they’re traveling through our service territory.
We only have about 40 batteries. These are Earlier this year we kicked off the Take Charge residential batteries. They’re mostly residential. Arizona pilot. That is level two, level three There will be a couple of commercial customers. charging, but we’re excited about getting that out, But these will also be controllable from the partnering with some of our customers, and system. So we’ve run a couple of different types seeing how they actually interact with the of events with our cool rewards programs. We’ve charging, how we can effectively leverage attempted to test the effect of the precooling with managed charging. So we’re really just starting the reduction heading into the on-peak period. to dip our toe into the water a bit here in the We’ve also tested some firm load dispatch, to see transportation electrification space. We’re very how they perform, compare and contrast, and excited about it. The expansion of the customer trying to also get more intelligent about facing demand-side management and DR locationally how can we dispatch some of these programs, over the last couple of years, our DSM resources in order to add benefit to the system. program has really shifted its focus to solely peak management, or mainly peak management. With regard to the rewards program, we are While that is still important, we want to make already seeing pretty significant reduction. We sure that we are actually delivering on what did have an event earlier this year where we saw customers want. We know that customers want, over 18 megawatts of reduction, that was a most customers, or some customers, want those sustained reduction. And so for us, we are all in cool technologies that they can interact with, and on the rewards program, and thinking about they want a deeper experience than they have what’s the right incentive level for customers to traditionally received from their utility. participate in that, so we can get kind of line of sight and visibility to those connected devices in And so we’re looking at ways to do that through our customers’ homes, so that we can, to Speaker our DSM program, and then also exploring with 1’s point, as situations happen on the system, that various potential partners on how we can we can respond to them more timely. Events leverage AI to get better messaging to customers,
80 so that they are receiving the information on how Speaker 2: Yeah. to be successful on those more modern rates that we talked about earlier. Some people are very Questioner: Can you explain a little bit more easily open to those more modern rates, and some about that, what that means? people struggle with that. And so we want to make sure that we’re making it as easy as possible Speaker 2: Absolutely. That is all about for all of our customers, and that we’re delivering customer experience. So all customers have to in as real time as possible information so they can opt in to the rewards program. They receive a $25 make actual changes to be successful on their incentive, for example, to opt in to the program, rates and with the technologies in their homes. and then they will receive a $25 bill credit for OK, that’s me. every program year thereafter. But we want to make sure that customers still have control over Moderator: Speaker 3? Oh, I’m sorry, question? their homes. We don’t want them to feel like we’ve just taken over control, and they no longer Question: How does it work with, is there any have autonomy in their homes. And especially in pricing response to deciding when to implement Arizona, that’s very important. Arizonans do not these? Or is there time-of-use pricing at the like to be told what to do. [LAUGHTER] God customer meter as part of it? I mean, it seems love us. very innovative in terms of use of the technology. But I’m curious about the integration of what’s But we have the lowest opt-out rate across the going on there with this program and the actual country, according to what Energy Hub is seeing wholesale market and what prices are there. with their other clients. So even though customers have the right to still go and change Speaker 2: That’s an excellent question. We’re their thermostat back to what setting they’re not there yet. But that’s where we want to get. I comfortable with, we’re not seeing that happen a will share part of my background at the company. lot. But there’s always going to be those potential I ran the real-time trading desk for several years. for circumstances where we’ve decided to And so I want to get us there. I want to make sure execute an event, but maybe somebody’s having that we’re delivering customers information. So a book club, or they have family over, and they for example, if our neighbors are pushing us tons want them to be comfortable. And even though of negatively priced energy, I see a future where we’re only changing the thermostat plus or minus I’m signaling to maybe a large commercial two to three degrees, that means a different level customer, this is the right time to charge your car. of comfort to some people. So we want to make Charge your car right now. Right? And so we’re sure that they understood that they still maintain not there yet. But testing these technologies and control in their home. the way that we’re doing and bringing more connected devices into our resource operating Moderator: Speaker 3? platform is how we’re going to get to that eventuality. Question: Yeah, I just was curious about the residential battery arrangements. And I don’t Moderator: Any other? Yeah. want to get too deep in the weeds, but some of my questions are deeply institutional. Like, for Question: You had, two or three slides back, you instance, does the residential customer own the said, it said that you allow customers to override battery? Does the utility own the battery? Can the peak events without penalty. the customer operate the battery? Is it just a
81 convenient location to stick a battery so that the little bit challenging, is, as we talk to the utilities, utility can operate it? And also, roughly, how I think what we’re learning is they all agree the large are these residential batteries? behind-the meter-market is lost. And when we listen to most of the utilities, it’s about facilitating Speaker 2: I don’t know the answer to the size. I this marketplace, not necessarily participating in probably should. I should also probably share it. Because you’ve literally got trillions of that until approximately two months ago, I was in dollars, the biggest companies in the world regulation. So I didn’t have to know the details. designing and building and innovating all kinds I’m still getting caught up. But the customer can of new technology to get behind the customer operate it. They were chosen for their location meter. And I think from a utility perspective, it for the most part. We reached out to constrained will be very difficult to do anything but facilitate customers on constrained feeders to try to make what’s going to happen behind the customer sure we were putting batteries in places where it meter. would be most beneficial to the system. But the customers would still also be able to control. So So we spent yesterday talking a lot about both the utility and the customer could control the electricity restructuring, and about half the resource. But I’m not sure about the size. market, in terms of megawatt hours, is restructured, and about half is not. But those Moderator: Other clarifying questions for markets that did not restructure face huge Speaker 2? OK, we’ll turn to Speaker 3. challenges in terms of getting to the zero carbon goal and stranded assets. So in a restructured Speaker 3. market, if I build a plant, and you build a more Hi, everybody. I’m with IPP Connect, a small efficient plant, you push me right out of the consulting firm. The Moderator and I have in the market, and I’m gone. In a regulated market, past worked together for about seven years with that’s a stranded asset for the next 20, 30, the Galvin Electricity Initiative. As part of that however many years it takes to pay that asset program, we were looking at policies from back. So as we try and get to zero carbon, the around the world and prototyping microgrids and regulated markets become a barrier to that, projects that brought utilities and the private because you’ve got these assets. sector together to see what could be done to help transform the electricity sector. And I think that Now, Florida Power and Light’s making huge program revealed that the FERC, the ISOs, progress, and as we heard on the solar end for working with the states, working with the utility, APS, they’re making huge progress in certain working with the local governments, the local areas, like gas for Florida Power and Light. But community side, really all coming together is it’s still going to be a huge challenge for them, something that could help. So today I’m going to because they’re building more assets and talk a little bit about how utilities can transform spending more money. And so I think it’s going themselves by focusing on their distribution to really impact the price. And what we’ve seen systems. [INTERRUPTION] is, the price in regulated markets is rising much faster than restructured markets. And I think Comment: Sometimes on the customer side of the price usually forces regulators in one direction or meter, things don’t work. [LAUGHTER] another at some time. As you reach limits to what the customers can bear. Speaker 3: So the first thing I’ll pose to everybody, and the Moderator asked me to be a
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But I just wanted to show you quickly, I was involvement in our power system. And it’s a actually listening to the FERC chairman, John critical component that we’re missing. Norris He’s no longer the chairman anymore, but he was speaking at a conference. He came from What I see coming in the future is that we’ll be Iowa, and he’s really proud of the fact that he adding the local component to the grid, and I’m fought restructuring and stopped it in Iowa. And suggesting that the utilities that join and partner so I had to get on my computer right away and go, with their cities, bringing the FERC and the ISO well, what the heck did pricing look like between along, to prototype and build and design the Iowa, Illinois, which, Illinois is the only system of the future, are the utilities that will restructured state, and those are all the states in succeed going forward. the top there that surround it? And I just had to go look and see, but what happened to pricing And so what you see coming, from my during this period, since restructuring really perspective, is both utility microgrids, and started? embedded in those utility microgrids will be private microgrids. And I’ll give you one And you can see, it’s Illinois, they’ve added some example. We’re working with a utility and a high distribution. ComEd has got a lot of regulated state, and a huge developer. This programs going on right now, smart grid, etc., happens to be in a disadvantaged area in the city. that’s added a lot of price to the distribution, but And we’re building a microgrid that’s going to be even with ComEd increasing their rates roughly split. So the utility’s going to own the significantly, you can see the overall price didn’t microgrid on half the property, and then where move that much. This is not adjusted for the owner owns all the buildings on the other half, inflation. But it’s quite a stark contrast. And I we’re going to build a private microgrid. There’s just looked at the large regulated states, versus the going to be solar on all the buildings owned large unregulated states, and you can see a pretty privately, and the microgrids will be able to be stark contrast with the big states, what’s connected. We’ll have switches that will allow happening. I think it means that it’s an important the private microgrid to actually island the entire time right now. And I think some people here facility. have talked about, we’re at an inflection point, and I think Speaker 1, you said it very well, this It’s $35 million of investment and about seven inflection point is that utilities need to get focused megawatts of solar, four megawatts of local on their distribution systems. They need to be generation, all the site distribution for the private able to handle what’s coming, and facilitate it and sector side, and the utility will probably have to support it. Because it’s coming. It’s just there’s invest about 10 million for all their electrical no stopping it right now. stuff. Well, for the 35 million, between TIFs, opportunity zone credits, tax credits and And so that’s what I’m going to talk about today, depreciation, not even counting depreciation, is how do we do that? How do we help the actually, we’ve got $27 million in incentives on utilities grow by focusing on what is their core that microgrid. So here is now the utility working business? I’ll start by saying, our entire with the private sector to create this much more government is set up through a federal level, a sustainable development, leveraging all of the tax state level and a city level. I would argue that as credits that the utility would not be able to take the utilities bought up all the municipalities over advantage of. And it just shows an example of the last 60 or 70 years, we’ve lost the local how working together you can have a completely different type of project built than you might have 83 had if the utility had just supplied power to that anticipate. We need to manage the distribution whole site by itself. system in real time, which to me tells me we have a distribution ISO coming that will work with the And we’ve worked on a number. Right now PJM, the ERCOT, what I’ll call the regional you’ve got Exelon, ComEd working with the ISOs. They’ll become tandem partners, but the Brownsville microgrid, and that looks like it’s distribution ISO’s going to manage the power going to be a private/public partnership between quality and the immediate response locally. But maybe the local university and Exelon, where the they need a whole bunch of assets behind the university will build extra generation as part of a meter in order to do that. And that includes gas- boiler upgrade, and will supply the power fired generation. whenever ComEd needs it, to isolate an island, a substation. So what you really see here is at the Now, gas-fired generation will be used local substation level, all kinds of new things. differently. It will be used more for demand response. Diesels will pretty much be gone. And But it requires piloting, prototyping. It requires that will all be replaced by a gas-fired bringing the ISO and FERC together, because as infrastructure, because that will give you a little I’ll explain, there’s a lot of moving pieces when bit longer response if you need it. So, if you you’re trying to do this. So what is the role of the needed for three days during a huge outage, or utility of the future? And I think defining maybe a week during a major outage for the grid, yourself as your objectives, what you’re trying to you could still run the entire microgrid locally accomplish, two-way power flow, to support the using that gas-fired generation, the solar and the renewable power and transportation sector. As other aspects that are there. But, normally, that Speaker 1 said, right now we don’t have that. We gas-fired generation would be used for price have a lot of parts of our grid that are still fused. response, with batteries, whenever they make it They can’t even take reverse power flow. They economically, which right now they’re not. can’t even take, really, much of any distributed energy on the circuit. We need to deliver power And we do distributed energy studies. Literally, to the electric transportation sector as it grows, I’ve done them in almost everybody’s territory. and projects can go anywhere from 10% to 30% We run all the different technologies, and I can that might add to the electricity system. And I get tell you, we have not found a project yet that Ricardo, which is the transportation magazine. It could work on batteries, at any rate what’s out comes out quarterly. And they’re the there right now. So building a high reliability transmission. They really drive the transmission distribution system, and I’ll show you what that side. Well, Volvo is moving to a complete plug- is, managing power quality, providing for in hybrid basis. In about five years, you won’t be resiliency at the substation level, are really to me able to buy a Volvo that isn’t a plug-in hybrid car. what the, so now I’m going to talk about how, and Ford’s going to have a complete line of plug-in I’m just give you some concrete examples. electric hybrid vehicles. And I’m just going to walk you through this. So And anyone you know that owns one only, even first is what I call microgrid mapping, and though it’s plug-in, and even though it’s hybrid, beginning to build. And this is Westchester they’ll only put a couple of gallons of gas in a County. But what you can envision is the utility year, usually, driving around a city. So I think the pretty much looking at their substations, dividing transportation sector is going to move much their whole territory up into a network of faster in this direction than even some of us substations. In many cases what you’ll find is 84 those substations serve cities. And now they’ve wouldn’t necessarily have to give me as much created a situation where they can begin to money on the demand charge of savings. So partner with those local cities, to begin to build utility could take more back. out this distribution system of the future. But it requires dynamic rates. Once the infrastructure’s built in terms of behind- the-meter assets, the rates can change, so I see the I’m going to give you one example on dynamic rates changing dynamically over time. But they rates. The only utility I have found in start with more firm pricing, and then they can restructured markets that, raise your hand if you move to more like a capacity charge. Of course, know another utility, because I’m very interested some are doing demand response payments. And in talking to them, because I’m working with a we’re doing some projects right now with utilities large property owner, and we’re trying to change looking at substation. And I’ll give you one how they portray power across the country, as example. We’re working with a rural utility well as use distributed energy as a lever to do that, that’s got six or seven substations. It’s going to to get cheaper power. And what they’re looking cost them $20 to 40 million to run a new line to for is getting access to real-time price markets. cover those substations. They can’t own Well, if you’re below five megawatts, I can’t join generation, because they’re in a restructured the PGMI cell, or it’s hard to do. So I’m looking market. So now we’re looking at, well, could for real-time price rates. And ComEd was the they lease the generation from a supplier at the only one I could find that had one on their books. substation? They lease the land and lease the It’s one of the most effective things you could do generation back, maybe under a cap, though as a regulator, is to get your utility to offer a real- we’re not sure that’s possible. That’s what we’re time price rate, and so that the customer at least looking into now. had a choice to leave the retail supplier and go to that real-time rate. But the community choice aggregator right there could then leverage that generation to go into the That’s really important, because the innovators real times and save a tremendous amount on their out there will then find ways for that customer to real-time procurement, I’m sorry, on their leverage that rate and lower price and allow your aggregation for the local community. So again, customers to gauge against the retailer providers it’s a public/private partnership that could bring and have an option for that. Demand charges are that all together. But what do you need to start extremely effective. ComEd has a very effective with? demand charge right now. It’s from 9 a.m. to 6 p.m. It’s a fairly high demand charge. That, So after I finished working on the Galvin combined with the PJM capacity charge, and then Electricity Initiative with the Moderator for about moving to real-time pricing, gives me the six years, we had built a, working with a team of paybacks I need to be able to put distributed industry leaders, the first ever PEER. It’s called energy in. PEER. USGB now owns it. We sold it to them, the Galvin Electricity Initiative did. And it’s the Now, once that distributed energy’s paid for, you very first international standard for electricity could change that demand charge. You could systems. And it provides you with a shorten the period. You could go to a dynamic comprehensive set of metrics, and you can get demand charge, where the distribution utility’s rated to it. You can just use it as a standard for calling on me, just like the capacity charge, which developing your microgrid. A utility could use it. would mean I wouldn’t run as much. You Chattanooga is certified to it as a municipal 85 utility. Naperville used it as their scorecard for essentially has no outages, because they’re also their program. underground. Chattanooga has gone from SAIDIs in the range of I think 200 to SAIDIs And it’s being used internationally now in India, down in the 50s. And Chattanooga sees a lot of and I think three other countries. So, we’re tornados, a lot of problems. They’re all overhead. getting slow adoption on it, but it is out there, and But it’s just amazing what they’ve been able to it’s available, and it’s the first really independent do. standard, like LEED. It’s kind of like how LEED is for buildings, PEER is for the energy However, they’re stuck now. They can’t do distributed to the building. So now we have the anything else. They build this Ferrari, I call it, of full package covered in terms of energy delivery a distribution system, but Chattanooga is to the building. But what you see here is a set of completely locked by TVA. No customer can put comprehensive metrics that you can use now to anything behind the generator without TVA’s measure performance and drive your strategies approval. Naperville, same thing. Naperville’s and your tactics for how you’re going to get there. in a 60-year agreement with the Illinois Municipal Energy Association. They bought into I’ve talked about self-healing distribution and a coal plant in 2005 when gas prices were high why it’s so important. This was the city of for 50 years. It’s this huge coal plant in Southern Hinsdale, again in Illinois, ComEd’s territory. Illinois right now. It’s supposed to be clean plant. They had two substations feeding their main It went in, it came in way over, so their costs went downtown substations, with the hospital on the way up on the generation side. However, substation, all kinds of things. But you can see, Naperville delivers power for much lower than it’s fused going out to the customers, and it had ComEd on the distribution side, yet they have this no disconnect for the two feeds. So actually, even incredible underground, no power outages, you though you see two feeds coming to this, if don’t even see a wire in Naperville. there’s a fault anywhere along that line, it takes out the entire substation. All it took was putting It’s really to me the future of an energy system. in two smart switches. These smart switches cost And I think we don’t think in scales of time. If like $200,000. They’re not very expensive. But you’re a distribution operator, you’re going to be now with the two smart switches at the substation there for the next 100 years, no matter what level, we can isolate the two area substations, and anybody says about all these distractions, I call this eliminated outages for this city. The city was them, about, we’re going to lose this, we’re going experiencing, because it was all trees all along to lose that. It’s just, what’s going to kill a utility that. It was all overhead, very bad. Now what is their city, not what’s happening on the you see on the right side is, we’ve looped the technology side. If your city dies, your utility circuit. We tied it together on the right side. And dies. That’s just the economics of this whole we put smart switches all along. Now we have a thing. So if you’re with cities that are growing, high reliability distribution system. We can move you’re growing. If you’re with cities that aren’t the open anywhere onto these two loops. We can growing, you’re losing load. And that’s pretty now isolate any faults immediately. much fundamentally how it’s going to move.
These switches talk to each other, and they isolate But the bottom line is, these two utilities are now immediately. Chattanooga and Naperville have trapped. They can’t do anything else. And that’s both built these systems. They have complete to me what’s wrong with the regulated market, is high reliable distribution systems. Naperville that the generators always want to protect their 86 generation. Usually at all costs. And their programs will be designed to really not, even though they’re trying hard, it’s just very difficult. And the city recognized that investing in the grid You can go so far, but you’re going to run into was an important part of their sustainable future, limits as to what you can do without restructuring. both from an economic perspective, as well as This is what the looping looks like, just from an sustainable goals. But I’ve not seen Rider LGC aerial view. You had all these radial lines going anywhere else in the country. Coordinating into the distribution system, and now they’re all underground work with road and sewer work, it’s looped in their smart switches out there. It’s something we just don’t do. Cities are constantly fairly effective strategy. It works. Chattanooga’s tearing up their roads, and we’re never putting done it. A bunch of other utilities. Florida Power conduit in. So we’ve got these wires running and Light is doing this right now throughout their right along the street, and the city will be doing whole system. In fact, S&C Electric built a whole all this work, doing all this stuff, and there’s no factory down in Florida just to make and supply coordination to put conduit in, so that you can the switches for FP&L’s program. It’s a great come back later, and you could move the wires economic story. underground.
Next is protecting critical facilities. So we’ve Because I fundamentally believe that last mile done a city scale plan with a utility, and we eventually needs to go underground. We can identified all the critical facilities, what circuits fight it for as long as we want to, but eventually they’re on, and then developing strategies now the cities are going to force us there. And the for how we help them get more generation so they more you invest in your overhead system, you’re can island to protect those critical facilities, and investing in something that eventually needs to looking at substation islanding, also. Eventually, come down, at least in that last mile. I’m not once we get enough generation behind the talking about the entire system. Coordinated customer meters. So leveraging the local identification and action is critical essential government. Illinois has one of the most service, leveraging city resilient facilities for grid incredible riders I’ve seen anywhere in the service. Of course, coordinated tree planting and country. It’s called Rider LGC. If I were a trimming, most utilities do this. Coordinated distribution utility, I’d be fighting for this. What communication and education, I think most a Rider LGC allows is for the city to specify an utilities do that. investment, and it gets charged to their rate payers. But what I meant by that slide is, it’s really becoming a partner long term. So leveraging rate The only problem with Rider LGC right now is it riders, I’ve talked about rate Rider LGC. What has to be paid back in one year. We’ve been about a new development? And this is the power advocating for that to be a longer term payback. that you as the commission have. And Hudson Let it be five, ten, 15 years that the utility can Yard is my best example in New York City. charge it. This puts the city in the game in terms Here’s Hudson Yard. Massive new development. of building an electric system that will help them First thing Con Ed tells Hudson Yard is, we can grow, thrive and survive. And so this was a case only come to the property line. The where the city and the utility came together to commission’s not going to allow us, because of build a long-range plan, a 100-year plan, for how the cost, to go there. Hudson Yard goes, “Geez, their distribution system was going to transform if we have to build electric distribution, we’ll and how the utility, the city will help pay for it. build chilled water, hot water, a central plant, a 87 huge sustainable system. It’s going to be cool and electric heat. You cannot humidify in that credible.” Con Ed sees that and goes, “Holy cow, situation. It’s just a disaster. And your costs, I they went to the commission and said, ‘Give us was in one of these buildings for a year while we approval to go to all the buildings in Hudson were transitioning from our home to a condo, and Yard.’ The commissioners said, ‘OK.’” They my first bill in January was $250. It was just came back and said, “We’ll build all the totally unsustainable. distribution to your buildings.” Hudson Yard said, “Well, if we’re not going to be doing that So we’ve got to figure out how, and that’s why electric distribution, forget all that thermal PEER was designed to work with LEED, is that distribution. We’ll just go back to the old way we LEED’s doing a great job of trying to get this used to do it, and just deliver power to the efficient building and how it looks, but it’s not buildings.” considering the impact of the energy delivered to the building, chilled water, hot water, power. So And so new development, if you stop at the there’s a huge opportunity working together to property line, you allow sustainability to happen get there. And of course, maybe a rider on with that, within that customer. New resiliency. But these can all be riders that can be development is to me where you have an built into your systems working with your city opportunity to either let the utility play, and this and your utility. So in terms of tools, Rider LGC, is what I’m going to say next, is let them into look at the ComEd real-time rate. It’s one of the reliability two-way power flow, I think that, this best rates we’ve seen, as well as their demand. was the smart grid rider for Commonwealth Just their standard rate for commercial. You can Edison. They had a rider to basically go do this go to the UHEBC PEER program and learn more throughout their system. They didn’t get very far, about that. And then if you email me, I’ll send because there just wasn’t enough money. you, we have an example, utilities’ city-scale Utilities need a master controller to control this smart grid plan. two-way power flow. It sends signals to the price assets, to send price signals to the assets and call And then the other thing I did, and this is, in one on them when they need it. But district energy. Excel spreadsheet, I took ComEd, and I took all their spending, this has got their entire budget, the So my feeling is, we’ve got to go one or two ways rate. It shows their O&M cost, everything, over for sustainability. Either you stop the utility at the the last six years, and then I projected out 15 property line, or you let them in to district energy. years. If you applied all those riders that I just Let them do the chilled water and hot water on the showed you, including an O&M-shared savings building site. And maybe somebody else does the rider, including a few other riders, and I explain boilers and central chillers, but if we want all the riders in there, I showed how they could sustainable energy systems, we’ve got to decide. actually lower cost and increase their profits. Because in my city, Elmhurst, we’re going the They could lower the rates and increase their other way. If you can believe this, we’re building profits. It is possible. You don’t think it’s brand new apartment buildings, and we’re in possible, but it is. But it required a full set of Chicago now, and we’re putting unitary heat riders that we designed that could be applied pumps in those apartment buildings. together working, and then the utility working with the city, off they go. So with that, I’ll stop Now you talk about environmentally not friendly right there. Thank you very much. in Chicago, think about from December all the way through March. You’re basically running on Moderator: Clarifying questions for Speaker 3? 88
a facility that has islanding capability. It can make a return on that investment. And again, Question: This is a really fascinating once that investment’s paid off, you can change presentation. There were several mentions in the rates, and you can still use that asset in the both presentations about resiliency. And I’m future. curious, and clearly in your presentation, there’s a sense of the distribution LMPs, the wholesale Moderator: Next question. market prices actually penetrating down to the customers. And I’m curious the extent to which Question: This is a great presentation. On one of you feel like the technology would allow the ISO your slides you had Westchester County, and you to view in an aggregate sense some of these were talking about microgrids, my favorite customer demand response capabilities as kind of subject of gas moratoriums. It’s my a dispatchable resource in the long term, and how understanding that there was a large microgrid far we are from getting there, or if that’s even that was planned for Westchester County. I don’t possible. And whether that kind of thing, you know if it’s the project you’re involved in or were know, what role that has in sort of the concerns involved in. But because of the gas moratorium, about resiliency. they had to withdraw the fuel cell. They could not do the microgrid. Speaker 3: I think it’s very possible because we’re responding to the capacity ISO signals, so Speaker 3: That’s correct. We were looking at when it’s a capacity day, you know, the facility microgrids in New York, but New York is off the will be going to zero power to the grid, at least for table for anybody looking at distributed energy. those hours, maybe for five or six hours, just trying to make sure they hit the capacity. As long Questioner: The second piece that, and I actually as we have telemetry, we’re already getting the learned this in Massachusetts, and it’s worth real-time price signals. We’re getting the looking at. The City of Boston created, again capacity calls from whoever our support having the oldest infrastructure probably in the organization is, whoever supports you in that country, a system that if you go to file anything, venture. So it’s all there. The telemetry’s there. to put a shovel in the ground, whether it’s water, We can get the information out. sewer, steam, gas, electric, cable, it has to go through what’s called, and I can’t remember what Questioner: But the ISO just sees that as kind of the acronym means, but a COBUCS system. missing load. It’s not sort of integrated in— So they developed a software platform that Speaker 3: That’s correct. required all of the utilities in that area, if we’re going to open up this piece of the street, you’re Questioner: —as a— all coming to the party. And don’t come back for five, at least five years to do anything. So it’s a Speaker 3: Right now. pretty interesting thing.
Questioner: Like a demand resource that they Speaker 3: That’s fantastic. have, actually have to be dispatching. Questioner: And I mean, I think the challenge Speaker 3: That’s correct. But like in the ComEd that the department saw, because the legislature territory, Monday through Friday, from 9 a.m. to had us do a report, was the smaller cities and 6 p.m., they’ll be at zero. And so now you have 89 towns don’t have the, probably in some cases, the Moderator: Any other clarifying questions? OK, intellectual capacity to create a platform like that. now we turn to the lawyer on the panel. But if they do do it, it protects their most valuable [LAUGHTER] Speaker 4? assets, their roads and streets, so that they’re not dug up every 15 minutes for something. So it’s Speaker 4. kind of interesting, but Boston does have a pretty I’ll try not to be too overly legal. Maybe just a amazing system. I know I’m biased, because I little bit. The Moderator asked me to share some live there, but it’s good. views on competition in 21st-century electricity services. And I’ll just say that my contribution Speaker 3: No, Boston’s kind of very forward comes with a little bit of a California bias. We’re thinking. I think this utility corridor concept, and kind of crazy out West, as you heard yesterday, I think the utilities, the electric usually could be probably. And we’re crazy in all new kinds of the leader, working with their gas utility partners. ways these days. And sometimes they own both anyway. So they could be the ones that really help drive the utility I think thinking about competition and the corridor concept more fully throughout all the potential competition between utility and non- cities. It’s a great, great, yeah. utility providers of energy services should begin with the consideration of the potentially Moderator: Speaker 3, I had a clarifying addressable market, because why compete if question. The example you gave about, I believe there’s not growth potential? Is this like a pizza you said it was an inner-city project, where the where we’re trying to fight over who gets what utility was doing part of it, and you had a private slice? Or can we grow the market? The op. I’m trying to figure the dynamics of who traditional applications for electricity services see decided who was going to do what? Why was flat to negative growth. That makes it a very some of it private? Why was some of it utility? challenging situation to invest into. But I think What the incentives were for the different there is a lot of new growth potential that we’re players, and why they divided it that way? seeing, particularly in California. We’re seeing the beginnings of a movement toward mandatory Speaker 3: That’s a really good question. That’s building electrification. So taking the natural gas because the developer was being fairly out of buildings. In the last six weeks or so, aggressive. He wanted to build a microgrid on eleven municipalities have banned new natural the entire property. And he was trying to get gas connections. There’s obviously a lot of through the laws in that state. You had to own all controversy around that. It’s not going to work in the buildings. But he was going to sell off half of all climate regimes, or many climate regimes, the buildings on the site over time, as the even. But in California, it can work. development was built out. There are a lot of questions about what happens So it became a negotiation actually to say he to the natural gas distribution system as this would move back to basically the buildings he’s process plays out. And to be fair, or frank, a lot going to own long term, and just put the of the cities and counties that are banning new microgrid there. And since he had already done natural gas connections are the reason California the design, and he was going to have solar on all has a housing crisis. Right? So when Menlo Park those other buildings, they just worked to have an banned natural gas connections in new buildings, integrated design that would allow for islanding Menlo Park doesn’t build any housing. So they of the whole facility.
90 built like three affordable housing units in the last transportation are the way forward. Right? decade. So we’ll see how much this movement Getting the fuel out of distributed applications to in California catches on, and the degree to which the degree that we have, we are using fossil fuels, it moves into the areas of California that are is the way forward. And that raises all kinds of buildings lots of new housing product. But it questions about cost and choice and meeting appears to be something that is taking on a customer needs, but this is the direction that at momentum. And that creates new load growth least many states are taking in their policy for electric utilities. This creates opportunity, development process. both on the utility side and on the customer side of the meter as we think about deploying new So the big question then becomes, who will products in residential and commercial provide the services? And I think there are construction. reasons to think that IOUs have a lot of advantages when it comes to providing these In addition, there’s obviously a lot of new growth distributed energy services. And there are reason in load potential for transportation. California to think that they don’t. And I’ll just run through has identified a target of five million EVs by a few of them. An enormous benefit to having 2030. Opinions vary as to whether we will IOU provision of services is roll out at scale once achieve that target, but that is the goal, and a very approved by the commission. It’s much more large fraction of the EV fleet in the US is in straightforward, given regulatory approval and California. And when you go to places like where ability to place cost and rates, to see roll out at I live, it does appear that EVs are beginning to scale. IOUs also benefit from a very low risk and take over a substantial market share, and that so low cost of capital, so we can do this more creates both opportunities and challenges in the cheaply. distribution system, both on the customer side of the meter and in the system as capacity demands On the other hand, IOUs are not necessarily the change as a result of the new load. most nimble players. They have poor incentives to innovate when innovation might impair I think the other potential new growth investments that they’ve already made, as we opportunities have already been well-covered, heard about earlier. And I think there are also but you know, this question of what we can do in inherent conflicts of interest in the sense that if terms of price responsive demand, and IOUs are allowed to rate base investments that California’s actually a kind of a laggard in that generate load, they are potentially incentivized to place and in that area, but there’s certain a lot of spend customer money to get customers to spend opportunity to deploy technology behind the more money. And this is a big part of the reason meter, to generate new growth. And I would just that we don’t see GE and Con Ed and ComEd as emphasize that these are areas where there’s a single entity, as they used to be in the early part potentially enough opportunity to create benefits of the 20th century, and we see them as standalone for utilities and non-utility players. And the companies, one that provides products to question will be how to maximize the gains for all consumers and one that sells energy to parties, and avoid a sort of zero sum outcome. consumers.
I should just say, also, that, at this point, given As we think about moving to a more active, what we know now, in states that are interested in engaged customer side of the meter, this question deep decarbonization, building electrification and becomes relevant again. How to manage those
91 conflicts of interest. Unregulated provision of groups, sort of the old, what I would characterize energy services I think has a number of as the old antitrust thinking and the new antitrust advantages. It can be more nimble, and we see thinking. Traditional antitrust concerns involve that in the California ecosystem in spades. consumer harm, attempts to monopolize an area. Customer differentiation is a focus of the I think utilities already have a monopoly, and unregulated companies, and I think regulated we’ll talk about that in a second. Exercise of firms still struggle because of their focus on monopoly power, and most importantly in this system optimization and reliability to think from space, probably tying. a customer perspective, and from a customer differentiation perspective. So utilities are state-chartered monopolies. As such, they are in general exempt from the federal That’s where most startups begin. They try to antitrust laws because of state action immunity identify a narrow subset of customers that have a doctrine, also called Parker immunity. And in an pain point that they can solve. And that is not incidental way, Noerr-Pennington, which is sort typically a utility frame of focus. It can be, but of a First Amendment exception to antitrust law. it’s atypical. In addition, it’s easier to fail as an There have certainly been cases where state unregulated provider of energy services. And I action immunity did not protect investor-owned think, until we have a better sense for how and utilities. Cantor is kind of the famous old what energy services are actually desirable on the chestnut involving light bulbs and Detroit Edison, customer side of the meter, both from a private where a light-bulb program by the utility was perspective and a system perspective, ability to found to be an impermissible attempt to fail is a real advantage. We want to see entry, but monopolize the light bulb market and we also want to see exit. We want to see things anticompetitive as a result. die. And it can be hard to kill utility programs. More recently there was a dispute between In addition, the incentives are much higher for Arizona Public Service and Solar City that was success. The successful unregulated entity is settled, but not before the Ninth Circuit found that going to be able to keep the supernormal returns the case could proceed on an antitrust claim. So from their successful innovation, utilities less there is some question, and the case concerned likely to be able to do so, if at all. Cost of service proposals around rate structure and the allegation versus value provided. On the other hand, on the part of Solar City that the proposed rate unregulated providers obviously suffer from structures were anticompetitive and an attempt to scaling problems, barriers to entry that raise push the company out of the market. As I said, prices significantly. And I’ll talk about one of there was a settlement, so we’ll never know those in more detail in a moment. And because exactly how the courts would have ruled on that of the greater risk, higher capital cost. I think the question, but I think it raises the issue of how risks are real, and so, I tend to favor pricing them commission-regulated authority is going to work accurately, and therefore an unregulated in a distributed energy context, where you have provision of these services. customer-sited generation that’s not utility- owned, that has the potential to compete with What are the traditional and the nontraditional utility-owned generation. But where that competition concerns that arise as we think about competition is modulated through rate structure. provision of energy services on the customer side of the meter? So I’m going to break this into two
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I would add, and I think this is actually probably innovation in the electricity space is not likely to more significant, and I should just say, on the come through some sort of blockbuster litigation. antitrust side, there’s an important judicial This is not going to be the AT&T breakup. It’s reluctance to enforce antitrust law. If you strictly going to come through influence on the way that interpret it, if you interpreted the antitrust statutes policymakers think, the way that regulators think, on their face, you might see attempts to and the influence of that thinking on competition monopolize everywhere. That’s called policy as implemented at the PUCs. companies making money and growing. So what would a pro-consumer competition And so there’s an understandable and legitimate policy look like? I think we need to start from reluctance to use the tools of the Sherman Act and fundamentals. We need to optimize the use of the the Clayton Act too much. There’s been a lot of shared monopoly services. So the IOU system ferment over the last five years about, or in sort needs to be optimized. We need to provide, it of new ways to think about antitrust law. And in would provide clear signals to optimize the use of particular with respect to the tech platform customer-owned DER. It needs to limit the companies, what I’ll call FANG. This new cream-skimming. Cream-skimming is a term I antitrust thinking is very much focused on the use use. I don’t know how common it is. But the idea of a platform to suppress innovation. So Apple’s of many of the criticisms for net energy metering, App Store being used in ways to suppress new that it’s harvesting customers and basically entrants to the app market that would compete harvesting, avoiding cross-subsidization and potentially against Apple-provided services. This pushing costs onto non-participating customers. new antitrust thinking is much more firm- focused, focused on the competitive environment That set of provisions is possible in exchange for in which firms operate, less focused on consumer greater monitoring of anticompetitive conduct by harm. It is largely untested in courts, but I think the incumbent monopolies, especially in terms of politically it’s extremely important, and in the rate design. And lower barriers to entry for regulatory sphere it could become important. innovative services. And I think right now, there are important legal barriers, there are important And I would suggest here that the utility space regulatory barriers, there are important needs to pay close attention to what’s happening engineering barriers that are maintained in terms in the tech space because we’re going to get of interconnection rules. And I think the most pushed by whatever happens there. New important one is actually the last one, that there approaches to regulating platform competition in are important controls on information that’s the tech space have enormous implications for central to new entrants entering and competing in how platforms like a distribution-system ISO the market for customers, and I’m going to talk in might operate, interacting with customer-sided more detail about that. generation, customer-sided refrigerators that are, or more likely, water heaters that are interacting A key barrier that we observe in California and I with the distribution system and taking think in other states that are especially interested commands. in distributed energy resources, is information. Information is a trade secret in the utility industry. I should just say before moving on, I just want to It’s essential if you want to differentiate emphasize here, the new antitrust thinking, and customers, however. It’s critical for making the the influence it has on the electricity space and value proposition to potential customers. But
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AMI, advanced meter infrastructure data collected by IOUs is, I think, in practice, used by And information is the barrier. Of course, IOUs as a moat to maintain their monopoly privacy matters more than ever. And I think here, relationship with the customer. That’s a totally again, the FANG experience matters the most. understandable position. The customer The key question for electricity, and it has been relationship is the most important monopoly that for the better part of a decade is, what is the a utility probably has. That was something that balance between appropriate, open access and was said to me in direct response to a question customer privacy? Nobody wants people to about this issue by a prominent utility CEO from know the details of the goings on within their the Southeast. He said something to the effect of, home, particularly not in Arizona. And that’s a it would be pried from his cold, dead fingers. legitimate concern.
Why is it so important? I think the reason that However, customers also like innovation and information is so important is this customer services. And where information is a barrier to differentiation and value proposition question. that, we need to strike a balance. So the question, New companies grow and survive by solving the way I like to think about this is, do we want customers’ problems. Not all customers have the to be like Google in the energy space? Google same problems. And the more that research probably wants us to be that way. Or do we want examines AMI data from customers, and I’ll talk to structure more like HIPPA, where information about the access issues in a second on that front, is closely protected. There are strong legal but the research that’s been done at Stanford, at penalties for disclosure of information. And other places, looking at differentiation of AMI where is our AMI data on the spectrum right tends to indicate that residential customers in now? I’m just going to talk briefly about some particular do not look anything like the residential personal experiences that we’ve had at Stanford, average load curve. When we decomposed, or and I think many researchers have had relating to colleagues of mine decomposed the AMI data the acquisition of AMI to provide a little from PG&E service territory, we found that using perspective about where we are in terms of Hagen value decomposition, there were universal release. something like 200 Hagen values. The biggest concentration of variants was only 6%. So if you want to get AMI data to do research, you generally have to sign a contract for a single So there’s not a single residential customer. And year of data. The contract is an extremely that means opportunity for different services, if burdensome negotiation. There’s new terms those customers can be identified. If they can’t, added for each contract year. So you never just you’re dealing with a situation like California had get a renewal. So you get your 2018 data, and during net energy metering’s heyday where my then sign a similar contract for 2019 data. You wife idn’t like to go to Home Depot because basically start from scratch for every year. At wandering the aisles at Home Depot were low, least the utilities we work with typically impose minimum-wage hires from Solar City that would personal liability on the researcher for any release accost anyone who had the temerity to want to of the data. So if Vrinda Gopal, a colleague of like buy a light bulb or some mulch, and try to get mine, somehow the PG&E data leaks from his you to sign up. And that was the customer lab, PG&E can come and take his house. acquisition approach. Random, scattershot. That’s not how value is created by most startups.
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This is a reality that I think most researchers don’t nobody wants random companies to know when talk about, but I think it’s very important to think they’re on vacation using their smart meter data. about. There’s a lot of self-censorship in the But it might allow open access to high latency research that goes on in this data. There’s a data with available consumer opt-out. concern that if researchers publish things that are perceived as harmful to the IOU’s interest that So what that means is, you couldn’t have this gave them the data, that they will be cut off from week’s smart meter data for my house, but you future access to AMI data. And that leads to self- could have last year’s data. And if I didn’t want censorship in the academic work. There are you to have it, there would be a place for me to apocryphal tales about such kind of cutoffs opt-out of that data sharing. That would allow the occurring because certain researchers published kind of customer identification that’s so crucial to papers that were not viewed as favorable to the reducing costs for early startup ventures, and for entities that had provided them with the data. experimentation. And I think it would go a long way toward allowing greater competition and And this is the situation where the researchers are innovation in the space. not in competition with investors owned utilities. At Stanford they might start a company, but most I think there are enormous opportunities for academic energy research is not focused on investor-owned utilities and unregulated firms in startup generation. For business purposes, electrification. I think the size of the pie can grow increasingly, there are relatively straightforward substantially, and in fact, the only way the pie is opt-in policies for information from advanced going to grow is if electrification happens. metering infrastructure. Customers can share, Creating and capturing the value requites can give explicit permission for individuals firms collaboration, however. Investor-owned firms to share data. The data has relatively low latency. are going to be good at some things and really bad And the data quality is good, although certainly at others. And, just to elaborate on this a little bit, some firms would argue it’s not good enough, and the point that was made earlier about local that’s by design. But the key issue here is that it governments is enormously important here. requires customer acquisition prior to data access. Community choice aggregators in California are So you’re not solving my wife’s problem at kind of a poster child for lots of bad things. Ask Home Depot. Solar City can get her data once the Public Utility Commission about resource she signs on the dotted line. adequacy and you’ll get an earful. Where they are really good is in thinking about the interaction But not until then. And that means very high between land use, building codes and electricity. customer acquisition costs for companies that The CCA for the Peninsula wrote the might have a solution for particular customers but electrification code that is becoming the law all not for all customers. They’re picking needles over the Peninsula as local governments enact out of a haystack. So what would a modest shift new building codes to be consistent with the new look like in this? I think there is a potential to version of California’s energy efficiency code. have pro-innovation, pro-competition information rules that are a modest step toward So there’s this very interesting interaction the FANG world from HIPPA, where we between the retail electricity provider and the basically are today in the electricity space. That local government, because the local government proposal would keep the current rules for opt-in, is the retail electricity provider. And they can do for low latency data. Nobody wants to know, things much more effectively than an investor-
95 owned utility ever could. I think the first area to integration in ERCOT. So I’ve got mainly a few address in improving the competition situation observations to make, and it’s more piling on than on, in the distribution system, is this question of disagreeing with anything that was said. But on information. The firms that I interact with that that front, for us one of the main kind of concerns stand the best chance of creating value for ends up being lack of visibility in terms of what’s customers face an enormous barrier in terms of going on, in the distribution system. And it isn’t identifying which customers. They know they’re so much that we have to know that. It’s more out there. They can look at our research, which about monetizing the full value of these resources anonymizes all the customer data, and see the they want to participate in, ancillary services and customer that they could serve. But they can’t other features from us. find that customer without a randomized search, picking up grains of sand and hoping that they But we have kind of run headlong into the find the one that’s the diamond. distribution utility, and they’re not used to sharing information with us and things like that. And if we want to move in a direction where we So that ends up being a big barrier that I think electrify transportation, and we electrify needs to be overcome. The other thing that I’ve buildings more rapidly, which will create load run across, and it kind of touches on the IOU not growth for utilities, I think this is an important wanting to share information, but it’s a slightly hurdle that we need to remove from firms that different nuance. The utilities are used to polling really aren’t trying to compete to provide bulk at a rhythm that doesn’t align with market-based electricity or serve electricity over wires. So needs to poll the AMI meter data. And you see thank you very much. this on the retail level, but also on distribution level, resource level. And I don’t have a great Moderator: Are there any clarifying questions? answer for this, but because it’s kind of sunk Thank you, Speaker 4. Any clarifying questions? investments that have limited ability to poll. The OK, if not, let’s reconvene, I’m sorry, did I miss other thing that’s unique to ERCOT that we’re somebody? Oh, so let’s reconvene at five ’til. struggling with, with these resources is, resources are paid on a locational marginal price, a derivative of that, but load is paid on a load zone price, and that mismatch creates all kinds of kind General discussion. of difficult challenges. We’ve been focused on trying to get LMP payment for both, but I don’t Moderator: OK, if everyone takes their seats, we know how that applies in other jurisdictions, but can get started. So I don’t see any placards up, so that’s been a really big deal for us. I will start the questions. And the first question is, did I miss, OK, I’m sorry. Someone is the back So I just wanted to make those observations, has a question. No? because I think those are add-ons to some of the very good points that were brought up earlier. Comment: I can wait. But the other thing I would just share as far ERCOT goes is, that’s where we see a lot of Moderator: No, no, go ahead. That’s fine. resources coming into the market, and it’s not the Question 1: OK, well, so first let me thank the kind of traditional large utility-scale projects as panelists for all their input. I am actually very much as some of these distribution-level projects. involved in the distribution, resource kind of So I just wanted to make those observations and share with the group. 96
Moderator: Comments? Respondent 1: I completely agree with that comment, especially with regard to demand Respondent 1: I would just say that with regard response. We don’t know when an event or an to how we’re reading our meters, my utility is emergency is happening until we’re already in it. fully AMI-deployed. And, for those customers We don’t plan for that. We don’t know, or say, who are on a demand rate, we’re reading those oh, that gas unit’s going to trip off, or that coal meters every 15 minutes, and then we’re unit’s going to trip off, and now I need to figure averaging it over the hour to determine their out, you just have to respond. demand rate. But as we think to the future, how do we get information quicker, how do we bring One of my T&D guys asked me to build him a it back to our system, quickly analyze it and get real-time DR program. So I certainly don’t have information back to the customers so that they a solution. I’ve only been digging in for about can make changes in their home? two months now. But coming from the real-time operations and having responsibility for the real- One of the biggest criticisms in our service time operations, real-time trading desk, I think I territory about the three-part demand rate is that bring a different perspective. I understand what the feedback on how they performed it too late for he’s trying to solve for. And I hope we get to that them to do anything to change. And so it’s place where we can, in meaningful way, have a thinking about how do we get interval data at a real-time demand response, because you’re right, shorter interval that does align with the market to polling three times a day isn’t going to be the extent that it can, so we can get to that future sufficient. that I was talking about earlier in response to a question I received, so that we can kind of bring Respondent 2: I just want to say one thing briefly the two together, the market and what our end-use in response, which is that I think the issue of how customers are actually using, to signal to the to optimize the data to make it useful to multiple customer what is the right thing to do, and how parties is a really complicated one, and it’s not can they make changes to control what their one that is necessarily aligned with the other ultimate energy costs are going to be in their incentives that the wires companies face. And I home? would just note that there are places in the world where what restructuring meant was generators Questioner: So I think, again, that’s a really good subject to, in a competitive marketplace, a wires- point. I do think there’s a slightly different kind only monopoly, and a meter owner that’s separate of mindset to look at this, also, though, because from the wires, who sells data to multiple parties, especially in ERCOT where you’re starting to see multiple retail providers. And that kind of a a lot of different retail type offerings, so retailers structure might be better aligned with the kinds of will want to poll their customers to understand data needs that you’re expressing. how much demand response they have, for example, on things that they can curtail. And Moderator: Next? what they’re finding is, you only poll three times a day, even though the meter’s function is reading Question 2: I’m also thankful for this panel, and every 15 minutes or whatever, and those are huge I want to take sort of the flip side of the question barriers to these new kinds of products that we just got, and ask about the pricing side of the people are thinking about offering. story. So obviously if you were, if you want meter information to go to SCOs that are going to change the operation of the system or something,
97 that’s a problem, and you’ve got to do all the how to do it in the classroom. But the problem polling and everything that we’re talking about. that I’ve been worried about, and other people I But the other way is prices to devices. And so know who are working on it are worried about it, you send the price signals out there, and the [UNINTELLIGIBLE] particularly at Boston devices respond to the price signals, and that’s the University, is we do not know how to do this at way I tend to think about the problem. scale. We can do it for a small toy example, but when you’re trying to do it, the RTOs are And I would categorize the papers and the studies calculating thousands of locations every five and the initiatives that I’ve read on this, which is minutes. That’s teeny tiny compared to the not comprehensive, but I’ve read a fair number of problem of what you have to do down at the them. And the largest group of these papers and distribution system, where we’re talking about studies is completely silent on this question. millions and millions of locations. They just don’t address it. So if you look at the Reforming the Energy Vision in New York, and And then, we just don’t have the communication all the kinds of things they’re talking about early capability to process the information. What are on. There was one paper that dealt with this, but we going to do here? I mean, this seems to me it was basically ignored, and all the other kind of this whole distributed energy efficiency thing is conversation. So they’re sort of assuming that missing the problem that we actually don’t know we’re going to do this. This gets into a problem how to do it in a way that makes things better. of how you deal with aggregators and all the other We do know how to do it in a way that makes kinds of things that come up with that. The things worse, which is sending the wrong signals second class of papers, I read one yesterday that and then set up people to compete to make money was just published, and it makes the assertion, against the wrong signals. We spent yesterday which is, “Well, it’s easy. We know what the afternoon talking about that problem. So we’re wholesale price is at the connecting bus, and then really good at that. But how can we do it in such we have to scale it up for losses on the a way to make it better? Then we have to get the distribution system, and that’s all we need to right pricing models. And I don’t think we know, and now we’re ready to go. OK?” And I actually know how to do it. So what are we going read that, and I said, “This can’t be right. That to do here? doesn’t sound to me like a description of the system.” Respondent 1: I’ll just start by saying, I don’t know. We’re working very hard, because it’s not And I hear the third category, which is the things just the pricing signal that we’re trying to solve. we’re talking about today, where you’re down at The other issue that I’m working on internally the distribution system where we worry about with the teams that I get to work with is, how do voltage levels and voltage control problems. And we treat it like a real resource also so that we now we’re going to have two-way flow and self- account for it in our integrated resource plan? healing things. We’re reconfiguring the network How do we value all of these customer-sided all the time. And which strikes me as right. assets and resources and oil it up into a true That’s the technology problem, and so forth. But integrated DSM as an input to our integrated that has very powerful implications about resource planning? We are engaging with a whether or not we can actually calculate and whole lot of folks in energy efficiency space, who communicate the prices that send the right signals show up also in California, and things that start so that people are doing the right things down there, they want to see in our state also. And we there. And I know how to do it in theory. I know need to figure out how to calculate all that. It is 98 completely different than how the utility has systems and allow them to make some traditionally approached any of this. Right? And autonomous decisions, and then that passed up to so I don’t have an answer for you, but we’re a much larger system. But a lot of times I think working really hard on it. it’s the communication protocols are what we have lacking. I think legacy systems for Respondent 2: Prototyping, I think, is critical. manufacturers, where they dominate a certain And when the Moderator and I worked on the space, become a challenge coming. Galvin Electricity Initiative, Bob Galvin, who ran Motorola, was just really big on prototypes, at But an interesting topic that I thought you brought city scale, not at, like you said, lab scale. And I up was, your generator from one customer was think what we’re seeing in the prototypes we’re helping another customer, but that other customer building is three levels of control: primary, wasn’t paid for that service, because there’s no secondary and tertiary. At the primary level, the rate structure to support that. And so I think that engine, the battery, the UPS, the flywheel, will the rate structure is integrated with your question, respond immediately, milliseconds to change because we don’t know how to control the perturbations in what’s happening in the local systems properly, because we don’t know how distribution system. we’re going to be rewarded for the control that we might do. I think that’s one of the challenges we A system we were running at a facility, our have to overcome, is the rate structure needs to be neighboring facility came over to us and said, understood so that as I build the control, and I “Wow, you guys, we’re so glad you’re there. Our build this divide-and-conquer system, I voltage all summer long has been all over the understand how I’m going to control these place. It’s affecting our motors, other equipment systems, and what level of control I need in order in our, and now it’s rock solid.” And that’s to get the most value from whatever rate structure because our generator was sitting there on that may eventually evolve. circuit holding the voltage rock steady for all the customers on that circuit, even though the utility Question 3: Hi, thank you to the panelists. I just itself, without that generation source, was having want to make a comment and then ask a question. all kinds of problems on that circuit. So that I think one of the questions was, “Would utilities primary level. Then secondary, it’s like a master entering this space stifle innovation?” Yes. So controller, which is processing the tertiary there’s your answer. And it’s not just startups. I controllers, which are optimizing and looking at mean, we’re talking about Fortune 100 things. And I think it’s time-framed. You go companies globally that have heavily invested in from milliseconds or cycles to milliseconds to the capabilities, hundreds of millions of dollars, then seconds or minutes in that tertiary control, or to do distributed energy resources and efficiency, five minutes or ten minutes, whatever it is at the and they come to a state fully invested, with no tertiary level. I think there’s a lot of work going request for rate-payer recovery. All risk is on on right now on the control side to be able to have shareholder and the executives. automatic response so you’re stabilizing everything, and then optimizing over here on the So I don’t really understand why a state, except other side, the control side. I don’t know if that for what they’re used to or what they’re familiar helped at all. with, wouldn’t opt for more innovation from not the utility. Just because of the different business Respondent 3: I think it helped. I heard divide models. The question I have, there seems to be a and conquer. You submeter and subcontrol striking parallel between this discussion and 99 something from roughly 20 years ago, which what they were trying to accomplish in New created the Open Access Transmission Tariff. York. Striking parallel about utility-owned or not utility-owned, access to systems, being able to Question 4: Could I just follow up? Do you all sell unfettered. And I think I heard someone have thoughts on just some of the basic system mention a DSO or a distribution ISO, and the needs that are not out there? So advanced meters potential for an OADT. Now, granted FERC is to collect that data, protocols to share one’s one place to go to cover the entire, well, most of authorized data. And I don’t just mean the country. So that’s convenient for an OATT. consumption data, distribution-system-level data. This would have to be state by state, clearly, and What are the inverters saying? I could find a that’s complicated. But could you all comment customer that’s optimal for a behind-the-meter, on the need for an OADT and a DSO for this distributed-energy resource, but on the other side space to really grow and show its potential? of town, it might be optimal for the system. If I can find out both bits of information, I can go find Moderator: No comments on that? I think we a customer where it helps the system the most. actually did, a year ago we did a panel on what you could do in nanotechnology, but go ahead. So we have a problem with no collection devices, no sharing protocols, and that seems to also Respondent 1: I would just say, I think that’s a proceed the need for design, because how do you very hard problem when you don’t know even define value before you’ve identified the necessarily the system attributes you want to need or the customer? So could you comment on price. And when you’re dealing with a significant that? fraction of participants in a distribution system that are not sophisticated players. And those are Moderator: Actually, part of this may relate to two challenges, and what’s happened in New the point that Speaker 4 was making about what York seems to be a move with the market first, data ought to be available, and what not? I mean, and I would sort of contrast what California’s the first question is, who does customer data doing, which is subsidize the heck out of a bunch belong to? But then beyond that, you raise of things and put them out in the world and see questions about system data, it’s never been clear what’s valuable and what’s not. I don’t know to me why that shouldn’t be public information. which approach is the right one, but more And on flows on the system and where the information about where there are value creation constraints are in the distribution system. There’s opportunities seems important as a precursor to no privacy implications to that. market design. So one of the things that would be interesting is Respondent 2: I’ll just comment that I think it’s to develop protocols that reflect what data, simply a great idea. And I don’t know if there’s a place there is no privacy. There may be some security you could pilot it, because I think the New York issues, and I think we talked about that in that rev process would have come out completely panel we did on security, but there’s no privacy different had they formed something like an issues. Then there are other issues where there OADT to take that concept forward, because it are privacy, but as Speaker 4 pointed out, some of was just, to me, the REV process was taken over them are historical, I think you called them low by the utilities, and just taken off in a direction latency, and some of them are ongoing, like, am I that was just completely counterproductive to out of town right now, that kind of stuff. And try to make some distinctions and protocols. I’m not
100 clear that anybody’s ever really tried to that you get of that data. If you’re talking about systematically go through that. There’s been no an aggregate over a year, probably not. But if discussion about it. you’re talking about the five-minute samples, ten-minute samples, or even smaller samples, But it would be useful to really figure out exactly which may be what you really need to understand what it is. And certainly for people that are the opportunities in the grid as we see it, then selling distributed resources, whether it’s demand yeah, I think you could. response or distributed generation, the system data would be useful without even getting into the Moderator: Other comments? privacy data. Any other comments on that? Question 5: Thank you. Well, before I come Respondent 1: Well, you say there’s no privacy across as a cranky old bastard, let me just point information on the system data, and I’m not sure out that in 1980 I started working in solar energy, that those users that want that privacy would and if you had told me in 1980 that we’d have too agree. From my industry we have companies much solar in California in the middle of the day, selling services where they’ll take the aggregate I’d say you were crazy. sample data through a metered consumption, and they’ll do a data analytics on that, and they’ll Moderator: That establishes that you’re old, not subdivide the load into what they believe is that you’re cranky. consuming that power, when it turns on, when it turns off. Questioner: Yeah, I get that. [LAUGHTER] Now for the cranky part. So I represent utility- And so I think if I’m this hypothetical research scale solar and wind and all. We’ve been able to laboratory, and I’m investigating certain areas, I see over the last ten years sort of utility-scale would be afraid that someone would start to parse photovoltaics go from 50 to 60¢ a kilowatt hour, the data going into my facility to determine what down to two or three cents. And if you want to I’m doing. I can’t imagine an example of how put storage on that, there’s some deals that have that works. I was a skeptic when those that came been done for three to five cents. So solar has out with the building software that would predict obviously proven itself to be a low-cost what has happened in the building, but I have a technology to deliver electricity. However, in device on my home right now that samples the California, we now have a situation where, now data and tries to predict what I’m using in my that we’ve learned to do this for two to three house. And it tells me every morning when my cents, let’s go spend 20¢ a kilowatt hour to put it son goes to work at six a.m. that the garage door up on the roof and come up with something very opened, because it has figured out what the different. And in some applications, I don’t have garage door signature looks like. So I can a problem with that. But the vast majority of it I imagine that privacy could be an issue at some think, there is some concerns. point in that data. So there’s basically two issues here. One is, I live Questioner: So what system data actually shows? in the SMUD service territory. It’s a very progressive utility. It has a well-balanced Respondent 1: I think it depends on what system renewable portfolio. They’ve been on the cutting data you’re talking about. Are talking about edge of a lot of things in the energy sector for a flows on the system? I think that could show, yes. long time. They have a NEM problem. For every Again, it comes down to the amount of sampling dollar they spend on low income customers in a
101 subsidy, there’s three dollars’ worth of subsidy your utility, and FERC’s not interested in that at going to my neighbor across the street for his all. I think that changes pretty significantly as rooftop solar. OK? I’m a non-participant. I don’t you start putting large microgrids together, and care if my neighbor wants solar on their roof. basically selling power to the ISOs and whatever. Cool. They can do whatever they want. I just And the question really is, we have a system, don’t want to have to pay for it. And my concern PERPA was based on avoiding cost, and we may is that there’s a growing problem in California be moving into a different paradigm. Is the law where we have 6-7,000 megawatts of rooftop catching up with this? Or where are we there? solar under NEM, with stupid inverters. They’re the old inverters, and they’re not smart inverters, Respondent 1: Well, I would say to your first so they’re very limited in what they can do. point that we need to evolve a rate structure as the Totally invisible to the ISO. And we are having context evolves, right? And it might lateral, I to spend a lot of money upgrading things just to would say that NEM, on a straight energy rate, is basically keep ahead of things. probably not an appropriate rate structure in California, although we’ve moved to mandatory So, one, is that I think there’s an equity problem time of use, the time-of-use intervals are here from the standpoint of, we will take care of changing to reflect the solar peak, I think starting low-income customers, which we should do, and in December, at least in PG&E service territory. the people who are most capable of actually paying for electricity bills, homeowners with And so there’s a gradual evolution away from some financial wherewithal, are completely off where we started, which I think is appropriate for the system. So who does that leave? And I think lots of different reasons. As to the legal issues this is a growing problem that we’re going to see around DSO and sort of distribution-system in California, because you’re going to have a transaction, transacted energy, I think there are bunch of people in the middle, middle-income legitimate legal questions there. They especially people, basically, footing the bill. And that’s will arise if and when distribution-system going to be, I think, politically ultimately a investments have to be made to support problem. aggregation that’s transacted into a wholesale market. FERC is treading carefully there in rule So that’s issue one. You know, how do we insure 841, and I think there’s a 841a as well. But until that people basically pay their own way? As I we see the case, I don’t think it’s possible to said, if people want to do microgrids and predict exactly how that comes out. Beyond everything else, great. And if it has a value to saying that I think it’s an important issue, and it’s them, they should do it. And they should do it out an important issue to focus on the jurisdictional of their own pocket, and that’s wonderful. question as the situation evolves.
The second one, and Speaker 4, you may have Moderator: Questions, comments? some thoughts on this, is really the legal issue. And I think NEM, when it was first put together, Question 6: I want to touch back on the question and we may have moved beyond NEM, so I’ll that’s sort of relating what’s happening on the qualify that. But you know, the early FERC law customer-distribution level with the broader, on this, and I think it’s still the case, is that they’re larger wholesale market. And I guess ultimately billing arrangements. So it’s not a sale for resale where my question is coming around to is, what of electricity. That’s how they get around it. It’s is really the role of FERC in sort of setting policy just basically, you’re trading kilowatt hours with 102 or market design changes that are happening at is it permissible for FERC to require some sort of the customer meter level? ability for demand to participate in wholesale markets? Or can they allow state-by-state opt- And on one level, you would think on a state- outs? And, again, we’ll have to see, I would not federal standpoint, they shouldn’t be there. offer a prediction beyond saying that I think in the However, when one of the big arguments for long run a more efficient market will allow for capacity markets is they’re needed because if you demand-side participation. That’s from a policy don’t have sufficient installed reserves, you could perspective probably optimal. But we also live in have a generation deficiency where you never the real world where states value their meet peak load, and the lights go out during a prerogatives and their ability to control what’s super peak. going on in their jurisdiction. And so how we evolve for that world, how quickly we evolve in The counterargument to that is, well, if prices that direction is the real question. I know that’s simply go up enough such that customers not satisfying. voluntarily get off the grid, which is something that this kind of development would provide, you Questioner: I guess I’m curious amore about not would never have supply and demand out of necessarily so much where the legal is, but where balance. You would never have a resiliency or an should it go? Because I think you could articulate installed reserve deficiency, because the market an argument for the states that, hey, you might not would fix it. So my question is, and one of the need to pay for capacity market prices if you are examples that I have on this is, Baltimore Gas and actually using these distribution resources to meet Electric has about 8% of their super peak load is demand, to ensure reliability during super peaks, at the LDC level responding to prices, and they’re and by having customer actually respond. Your paid I think $1,200 a megawatt hour in the day- consumers are benefiting ultimately with the ahead market when they trigger you to respond, more efficient market. and you get about 500 or 600 megawatts and BG&E responding are high. PJM has scarcity Moderator: I think of it as a policy matter, that I pricing mechanisms, but this is outside of that. agree with you. I think the political problem, which is what it is, is not just guarding their So what you see as the load goes up, customers prerogatives, but it’s also what would be required are being paid $1,200. The load stops going up, of states to participate in that kind of program. but prices stay at $50, even though it’s 105 One is, they’d have to move towards dynamic degrees in Baltimore and humid and there’s all pricing in a much more serious way than most these actions being taken. So my question really states have chosen to do. And secondly, the goes to, are there design change, market design customer is obviously going to opt-in or opt-out. changes or FERC policies that need to be So that’s another variable. promoted to ensure that what’s happening at the customer demand side, particularly with respect But essentially, for FERC to offer that, saying, if to responding to prices during scarcity events you opt-in, you can do this. I mean, I don’t see a make their way into the wholesale market? problem with that, but I just see a lot of states resisting moving to the kind of retail pricing Moderator: Who wants it? regime that, and it goes back to the thing I’ve always talked about, which is, we spend a zillion Respondent 1: Well, I think, to my mind, the big dollars figuring out how to have the perfect question is the opt-out provision. To what degree wholesale price signals, and then spend the same 103 amount of time and effort and money trying to tests. We need to try all the different sorts of make sure no customer receives the price. So things so that we can get people comfortable. what you’re offering is sort of an enticement to avoid that kind of mutually-exclusive Now, coming from the customer technology side arrangements. But getting the states to move in of things, I want to do that faster. I want them to that direction is not going to be easy. Not just just trust me. It’s going to be perfect. Don’t because they’re guarding state prerogatives, but worry. But that’s not how it works. So reliability just because the politics of moving in that at the end of the day is a core tenet in who we are direction are very difficult, even though as a utility. So that’s always going to be a part of substantively, I think your point is well taken. the decision making process. So not off topic from my perspective. Question 7: Just to that point, both PJM, I don’t know about New York, but both PJM and ISO Moderator: Anybody else? New England are reducing their forecasted load and capacity procurement based on behind-the Question 8: Just a reflection, and then, well, let meter-resources. So we’re already starting to see me start with a comment. Speaker 1, you had that happen, regardless of the jurisdictional used the expression that if all power is green, why issues. And you can shut me down. do we even need efficiency? I think that is a question that needs to be asked, because there This may be an inappropriate question, because I actually seems to be a split in the environmental know we’re here to talk about markets, but I movement, in Maine at least, between one side guess my biggest concern with all of this still will say the only green kilowatt hour is the remains the reliability issue. And knowing what kilowatt hour not consumed, which is quite resources are there, and how much we can move astounding. That came from a federal senator. off of a centralized grid to distributed resources. And if this is not off topic, I would love to hear And on the other side there’s companies looking some responses. And if it is off topic, I apologize. at the kilowatt hours that are negatively priced in You don’t have to answer. ISO New England, and try to find uses for them. For example, in charging batteries might help, I Moderator: First off, no one’s capable of shutting don’t want to get into proprietary details, but you down. [LAUGHTER] they’ve got ideas and ambitions on using it. So I think it’s an interesting question to pose, and it Respondent 1: I was just going to say, I don’t needs to be posed more often, because if you’re think it’s off topic, because that’s one of the getting productive services out of that kilowatt central arguments we’re having internally when hour, I’m all in favor of it seen being used, rather we’re trying to quantify what is this actual than just turned off, shut off. resource, and how do I boil that into my IRP, like I was talking about earlier? Because at the end of The other comment is, and this is just trying to the day, reliability is what the IRP group is think more broadly about the impact on the working on. They are planning to make sure that utilities themselves, TNDs or restructured or we are there at every moment of every one of our unrestructured, the old vertically-integrated customers. And so since we’ve only completed types, and we’re talking about open access one full DR season right now, they’re just not distribution tariffs. If any of you are familiar with comfortable. They’re not there. We need to do the telecom industry, this was what led to more testing. We need to do different locational colocation. It was a fundamental change in the
104 way that the telephone companies that operated more insulation, because obviously they can’t see for nearly 100 years. And it had consequences the insulation. They can’t point to it. They can’t when there was subsidized access creating it on brag to their relatives that they have that. I don’t economic bypass, and it had beneficial think that my relatives out in California are going consequences when there was economic bypass, to call me and say, “Hey, I just bought a home when it simply, the phone company itself was with R30 wall insulation. It’s really slick.” delivering services or not delivering services that [LAUGHTER] You know, but they’d call and were needed, or delivering them very say, “I’ve got some really neat solar panels, and I inefficiently and overpriced. So I think if we can do the following with them. I’ve got a battery cross the threshold, we’re doing exactly what that does all these wonderful things.” And, like I went on in the telecom industry, and we should said, you know what engineers talk about with draw some lessons from that. their family. Right? [LAUGHTER]
Moderator: Any comments? Lessons? Respondent 3: But you can tell them that the wall insulation’s better for privacy purposes. Respondent 1: I would just second what was said on the panel about this conflict between Respondent 2: There you go. Better for privacy efficiency and clean. That’s definitely playing purposes. But efficiency’s not sexy. It’s not the out in California, and clean is winning. And that thing that sells. It’s the old thing in the industry. makes the older generation of energy regulators I believe that what you’ll see efficiency have to in California extremely uncomfortable. conform to is the smart building concept, where the smart building is really what we’re after. But even the consultants that provide information What we do want is, we do want buildings that to those people sometimes are uncomfortable operate properly. Unlike where I’m sitting up with their results, because they pretty clearly here right now where we’re all freezing, we don’t show that as the California grid is evolving in a really want to be really cold. We want to be just very clean direction, especially if you count large right. We want to have a little bit more control hydro and nuclear while we have it, efficiency at over our environment, from lighting to HVAC to the individual building scale isn’t the right way to the air supply. think about the problem, except in terms of cost. And there are still significant benefits to We see more and more standards coming in, for efficiency, but they’re very different and it’s a example with schools, where they want to control very different justification than the traditional how much carbon dioxide is in the atmosphere, one. so that the students will be brighter and smarter, because that will make all of our kids president Respondent 2: So I agree with that. That’s what someday. And those are the things that we’re I see happening as well, is that, is efficiency after. It’s that smart building concept. So I think perception-wise is not viewed positively when efficiency will have to mold itself to fit a different you compare it to green power. Renewable paradigm in the future. Again, as I mentioned, I power is the thing people want. It’s what people think efficiency and that smart building will also ask for. play a role in some of these grid services that we talk about as well. The example I gave of the California homes is a classic case. You know, buyers will pay more for Moderator: Yes? a home with solar panels on it than one that has
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Question 9: I don’t have a mike, but just a quick get pulled by just what happened in New York question. There was some reference to [SOUND REV, we get pulled by groups in directions that OFF THEN ON] just take us completely off-track of what our real objective is, which is a more efficient, sustainable Respondent 1: I think having a more independent system. oversight of the process, I think it got started in an independent way, but then it lost its, what I— And so that example I gave of building a new residential building in my town that’s basically Questioner: I do see one of— all-electric, and it’s extremely inefficient. And yet we’re supposed to be in this super high- Respondent 1: I’m sorry, lost its independence in efficiency time, and I’ve got unitaries, you know, terms of all participating by all the stakeholders you have heat pumps that don’t really work in in that process. Chicago, efficiently. Down in the South, you know, that would work much more effectively, Questioner: Well, I mean, specifically what and I’m just looking going, “How the heck could would be the problem? Because I thought it was a building like that get built today?” Now, it designed to be very open. feeds the narrative of electrification to renewable, Respondent 1: I just don’t think it came out that but now that building will be there for 30 years in way. I think it was attempted, but it just, you had, Illinois, where we’re not going to be even close a new utility group formed that sort of took to that in 30 years, just the way we’re going. So control of the REV process. Hiring the executive it just seems like we get off track a little bit. director, and really had, to me, over-influence on Respondent 2: I always had a question about the what it was, because I think the commission was REV program that I have never fully understood. headed in a good direction. I just think it got My understanding’s always been that there’s not taken off in a different way. an interest in investment in measurement, you And I think some of the outcomes, and having know, instrumentation of the network. And yet some kind of open access distribution approach there was going to be a market design process. would have better served it. But I’d also like to And I think that I have always wondered how that make a comment about the electrification and the could work, without a significant investment. I efficiency versus renewable. To me that seems guess it’s occurring in New York now, but you like a debate about rebates and incentives, and not know, the REV program really began before there necessarily markets, because I think efficiency was an instrumented distribution system, what I has come to a point where it is, it’s just going. It would take to be the technical requirements for doesn’t need, necessarily, the rebates anymore, actually having enough information to operate and it’s rolling. And so I think there is this and run a market. And that system is really community that’s fighting over incentives, versus expensive. So if there’s not a political there’s a whole marketplace out there that’s commitment to pay for it, I have questions about acting. And I brought the example up of building how effective a market design can be. electrification. Moderator: Yes. That’s not the efficiency way to go. And we’re Question 10: This question is really directed to still 30 years away from 100% renewable. If not Speaker 2. You said you wanted to get down to further away. And so it seems it’s strange that we real-time pricing, and I agree with you
106 completely. I think it’s a very serious problem, Respondent 1: I think that’s an excellent point. I and I just want to ask you, but I don’t know the don’t have a number to share with you. I’m sure experience in Arizona, but I’ve done the we have that someplace. And I’m going to go calculations, in the past, for PJM, because the back and track it down. But I think we have to data was available. And this is time-of-use get closer to the real time than we are today. I pricing. don’t know how feasible real time is, simply because of the latency between how frequently Let’s take time-of-use pricing as a generic idea, we read the data, how long it takes to get back to which is being pushed, you know, something we us, and then how long it would take us to actually should be doing more of, and we could do better, send feedback to the customer. I don’t have a and we could run all these systems and have these good sense of what that complete cycle would controls based on these time-of-use stories. And look like. And I don’t know how achievable it is, we’ve been talking about this for a long time. because I imagine just the volume of data that And this is really hard to do and get through the we’re going to be creating in that world. Right? administrative process. And then you do the calculation, and you say, just looking at the We already have tons and tons of data. But we’re wholesale prices, not getting into the complexity not using it today. And to me, that’s a huge gap of what’s happening on the distribution system, that it’s sitting right there in front of us. Why are how much, if you had a perfectly designed time we not using it to make more intelligent of use rate, which we can’t get, but if you had a decisions? Why are we not using that to inform perfectly designed time-of-use rate, with 24 hours our customers so that they’re better educated, and of time-of-use rate, and no revenue imbalance, they’re making better decisions, because in the everything was working perfectly, how much of absent of that, all we’re doing is, we’re putting the variants in the price that you wanted to signal out these time variant rates, which work better in to people to use would you capture in that our service territory than the flat rate for all sorts process? And that’s the proper measure of the of reasons. welfare effects of this. If you’ve been to Arizona, and if you’ve been to And the answer for PJM is approximately 28%. Arizona in the summertime, it’s pretty hot. So we So you’d capture approximately 28% of what want to shift as much load out of that on peak you’re trying to capture by going from flat rates period as we can. Our summer load is more than to time-of-use rates. I think spending a couple of double our winter load, and so that’s a significant decades trying to capture 28% is probably a waste challenge for us to overcome every day. And so, of time, and that we should just fight the battle how do we get more real time? I don’t know that and go all the way down to real time, because where we’re at today is the right answer, but I otherwise, when all these other devices are out don’t know how we’re going to get there in a there, people are going to be doing things which meaningful way. Or what is meaningful. I guess are actually counterproductive, because we’re not the question is, what would be meaningful to the sending them the right signals. Same issue I had customer? Is it real time, real, real time? Or is it before. Does that jive with your experience in 15 minutes? Is it five minutes? Is one hour Arizona about the scale of these numbers? And enough for them? I think we have to do a lot more how urgent it is that we actually get something work in this space than where we’re at today. that respects the real-time prices?
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Respondent 2: Can I respond to that question happening in the country right now, and it’s being with a thought? You know, one thing that strikes driven through all these programs that are being me about the challenge of getting toward real- run, whether by the utilities, aggregators actually time pricing, I was surprised by your number. I participate a lot, and in ERCOT they’re a big part thought it would be lower for the effective, of it. capturing the time-of-use variants in the real time price and time of use. And I just wonder if, even if we get the price signals out there, when you look at the economics One thing that strikes me is the potential that behind the energy-efficiency calculations, they electric vehicles have for increasing consumer look very far out into the future. They’re sort of acceptance of real-time prices. We have two EVs really facilitating making decisions for in my households. We have a Tesla and a Volvo. consumers going forward. Do we think if we get The Volvo is completely dumb with respect to them the better pricing, are we going to get rates, and the Tesla has programmable charging enough response from them? The way that I think that just tells it to turn on or turn off depending about this is, much or many of the energy on what the rate is. It strikes me that if there were efficiency measures that are being implemented more car, and the Tesla is connected to cellular have a shelf life, seven years comes to mind, I networks at all times. think, with how long they last.
It strikes me that that is an opportunity for So even though they get accounted for in the introducing real-time prices to retail customers demand forecast at the ISOs, which is really that’s pretty unique, because you’re deploying becoming important, they expire. And then I kind systems, pieces of technology where you have of wonder if in some timeframe we’ve got better controllable load, where you have the potential to pricing to folks, would we then be bridging the fully charge a vehicle and not impact customer gap? And would the actions get taken? Or are intuitions about how much charge they need, at we envisioning that we’ll have devices that least under most circumstances. You can always actually just take the actions for us? And it’s just override it, right, and just pay the price. But there kind of curious what you think about that, those might be potential there that doesn’t exist in many prospects. Thank you. applications. Respondent 1: I would say, I don’t know the scale I would argue that the key barrier to real-time at which we would see any kind of behavioral prices is public perception. So if you could put a change. But what I do know is that with our consumer product in lots of people’s hands that modernized rates, with the demand, the three- involves exposure to a real-time price and part, and the time-of-use rates, we’re already increase comfort with that idea, you could change seeing a significant change heading into the on- a lot of things in the rate conversation at the utility peak period. And so I can’t help but wonder how commission level. much more change I would see if I was able to get information to customers in a more timely Moderator: Last question. manner.
Question 11: Thanks, everybody. So I’ve been In my role in customer technology, the very first listening here intently, and I wanted to pick up on question I have to ask myself on any project is, some comments. You know, energy efficiency what’s the customer experience going to be with and demand response is a really big part of what’s this product or service? What’s the customer
108 journey going to look like? And how do I make inefficiency’s actually a really good thing. it as best and as meaningful as I can make it? And Right? Inefficiency means the denominator can one of the challenges that we get with the demand get much larger, because you need more and time-of-use rates, well, mostly with the resources to manage the same number of people. demand, is they’ve already blown it out, and now they can’t do anything about it. They set their And is this an issue? I mean, we haven’t talked demand. They probably set their demand for the about it yet. But is this potentially an issue where month, and now they’re upset. And customer in some sense utility executives are probably satisfaction is a huge part of our decision-making thinking still, “Wait a minute, how could I make process. It has to be. And so, I don’t know how sure I still have a good opportunity for investment much more change we might see, but we have to here and growing the base?” be better than we are today. Respondent 1: So from the utility perspective, I Moderator: Any other questions, comments? would say, with regard to how do we make our investment decisions, a reasonable level of Respondent 3: So just a final point on yours, your certainty that we’re going to get recovery is part question, is I think you’ll see, you talked about of the decision-making process. So I think devices making decisions for you. I think you’re Speaker 4’s slide with the pros and cons laid it out going to see more of the devices making very well. Those things that we’ve already decisions for you. I think that, when you talk received approval for, they’re very scalable. about residential, there may be some cases where We’ll blow it up, and we’ll do it well. residentials will change their normal mode of operation, and whether they’ll keep that is When there’s something new that’s coming along unclear. But I think you’re going to see devices that we want to do, and the process to get it having to make a lot of these decisions and approved from our corporation commission receiving the price signals if we can get the locally, it’s a long, protracted process, then the communications worked out. decision is, do we want to wait for recovery? Or, are we confident enough that we will put Moderator: Last question. shareholder money at risk? And that’s not an easy decision to make. That’s a decision that you Question 12: Thank you. So I had one quick have to take to approximately 14 different question to maybe put to the panel. I thought it executive committees to try to get people was very intriguing how Speaker 3 has comfortable with. And then you’ll do it all over particularly said this, but perhaps the initiative again just to make sure. was already kind of moving away from the utility into the private sector, or at least the impetus for But in the example of our Take Charge AZ pilot, controlling this or managing it. our electrification pilot that I was speaking about during my presentation, that’s just such an But I thought perhaps there’s a reason for that. instance where our executive team is so Maybe incentives aren’t quite right, especially in passionate that this is the right thing for us to do a regulated environment. And if I were a utility that we are putting shareholder dollars at risk. executive, I would want to have the appearance But that’s one pilot. That’s one project. And of doing all these great things. But in reality, I there’s so much happening in the world, and so want to make sure I have plenty of opportunity to many things that our customers want, and so invest in the distribution system. And so many things that we want to do, that we are kind
109 of cycled or held back a little bit because we need to know we’re going to get some level of recovery.
Moderator: Which goes to the question that we discussed a little bit, but not a lot, which is, should this activity be regulated at all? Or should utilities that want to do it set the spinoff subsidiaries to do it in an unregulated environment? But on that tease—
Respondent 1: I apologize. I just want to add one more thing. Or do you just create a sandbox? Can your commission create a, here’s a bucket of money that you’re going to go and get innovative and develop new solutions that work for your customers and for your systems. And then operate within that bubble?
Moderator: Sure. Just don’t call me from Jamaica. [LAUGHTER] OK, so I want to thank, join me and thank the panelists for an excellent job. [APPLAUSE] And we’ll be sending out notice about the next meeting. Thank you.
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